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1、1Impact of Fundamentals on Impact of Fundamentals on IPO ValuationIPO ValuationRajesh AggarwalRajesh Aggarwal Sanjai BhagatSanjai Bhagat Srinivasan RanganSrinivasan Rangan200920092MotivationMotivationn nThe second half of the 1990s witnessed several The second half of the 1990s witnessed several sig
2、nificant innovations in technology and the rise significant innovations in technology and the rise of the internet sector. This has been labeled as of the internet sector. This has been labeled as the the new economy period.new economy period.n nIn the new economy period (or In the new economy perio
3、d (or boom periodboom period), ), equity values in the U.S., especially those of equity values in the U.S., especially those of initial public offering (IPO) firms, reached initial public offering (IPO) firms, reached unprecedented heights.unprecedented heights.3MotivationMotivationn n“Early profita
4、bility is not the key to value in a “Early profitability is not the key to value in a company like this (Inktomi).”company like this (Inktomi).”n nJerry Kennelly, Chief Financial Officer of Jerry Kennelly, Chief Financial Officer of Inktomi Inc (1999).Inktomi Inc (1999).n n“But valuations are just a
5、s often based on gut “But valuations are just as often based on gut feel. As one entrepreneur told me, “Its as if feel. As one entrepreneur told me, “Its as if everybody just settles on a number that they are everybody just settles on a number that they are comfortable with.”comfortable with.”n nGov
6、e (2000) in Gove (2000) in Red HerringRed Herring. .4MotivationMotivationn nWere traditional value-relevant variables such as Were traditional value-relevant variables such as income, sales and book value of equity valued income, sales and book value of equity valued differently in the boom period r
7、elative to an differently in the boom period relative to an earlier time period for IPO firms?earlier time period for IPO firms?n nAlso, beginning from March 2000, the U.S. stock Also, beginning from March 2000, the U.S. stock market took a dive (market took a dive (crash periodcrash period). So the
8、 other ). So the other question is “How did these variables fare in the question is “How did these variables fare in the crash period?”crash period?”5Discounted Cashflow ValuationDiscounted Cashflow Valuationwhere,where, n = Life of the assetn = Life of the asset CFCFt t= Cashflow in period t = Cash
9、flow in period t r = Discount rate reflecting the riskiness of the estimated cashflowsr = Discount rate reflecting the riskiness of the estimated cashflows6Research QuestionsResearch Questionsn nWere the following variables valued differently by Were the following variables valued differently by inv
10、estment bankers and first-day investors in the boom investment bankers and first-day investors in the boom and crash periods relative to the second half of the and crash periods relative to the second half of the 1980s?1980s?n nIncomeIncomen nBook value of equityBook value of equityn nSalesSalesn nR
11、&DR&Dn nIndustry price-to-sales ratiosIndustry price-to-sales ratiosn nInsider retentionInsider retentionn nInvestment banker prestigeInvestment banker prestigen nWere the valuation of these variables different for tech Were the valuation of these variables different for tech firms, internet firms,
12、and loss firms?firms, internet firms, and loss firms?7Priors / ExpectationsPriors / Expectationsn nBased on anecdotes, we expect that income would be valued less in Based on anecdotes, we expect that income would be valued less in the boom period relative to the 1980s.the boom period relative to the
13、 1980s.n nBased on anecdotes, we expect that sales would be valued more in Based on anecdotes, we expect that sales would be valued more in the boom period relative to the 1980s.the boom period relative to the 1980s.n nGiven the above two priors, we expect insider retention and IB Given the above tw
14、o priors, we expect insider retention and IB prestige to be valued more in the boom period relative to the 1980s.prestige to be valued more in the boom period relative to the 1980s.n nWe had no priors on how things would change in the crash period, and We had no priors on how things would change in
15、the crash period, and so we let the data speak.so we let the data speak.n nFor technology and internet firms, we expect income and sales to be For technology and internet firms, we expect income and sales to be less valuable and insider retention and IB prestige to be more less valuable and insider
16、retention and IB prestige to be more valuable.valuable.n nFor loss firms, we expect income to be valued less, and insider For loss firms, we expect income to be valued less, and insider retention and IB prestige to be valued more.retention and IB prestige to be valued more.8Model SpecificationModel SpecificationDependent variable choicesDependent variable choicesn nPrice-to-earnings ratiosPrice-to-earnings ratiosn nProblem: Leads to elimination of IPOs with negativ
