Is Growth Rate Implicit In Ipo Prices ?

Muhammad Zubair Mumtaz () and Zachary Alexander Smith ()
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Muhammad Zubair Mumtaz: National University of Sciences and Technology, NUST Business School, Pakistan.
Zachary Alexander Smith: Saint Leo University, Donald R. Tapia School of Business, United States.

Journal for Economic Forecasting, 2015, issue 4, 70-89

Abstract: This study examines (a) the cash flow growth rate implicit by offer prices of IPOs in an emerging market using a reverse engineering DCF model and (b) the bias of implicit growth relative to the realized growth rate. We find that the estimated growth in cash flows is slightly higher than realized growth rate, which indicates that the median IPO firm is overvalued by 81% at the offering. It is observed that the estimation errors increase as a result of higher underpricing and diversified ownership. In addition, post- IPO returns are smaller for issues whose implicit growth rates are biased upward. We also find that IPOs underperform in long-run while employing a buy-and-hold investment strategy.

Keywords: initial public offerings; reverse engineering DCF model; valuation; growth rate (search for similar items in EconPapers)
JEL-codes: G00 G30 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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