The Impact of Fundamentals on IPO Valuation

Abstract

We investigate IPO valuation for a sample of 1,655 IPOs from three time-periods: 1986-1990, January 1997 through March 2000 (designated as the boom period), and April 2000 through December 2001 (designated as the crash period). We find that firms with more negative earnings have higher valuations than do firms with less negative earnings and firms with more positive earnings have higher valuations than firms with less positive earnings. This V-shaped pattern to the relation between value and earnings suggests that inference based solely on firms with positive earnings is inaccurate. This is especially true for the boom and crash periods. Our results suggest that negative earnings are a proxy for growth opportunities for internet firms. We also find that investment bankers and first-day investors assign different weights to post-IPO ownership and changes in ownership around the IPO for different classes of pre-IPO shareholders (CEOs, VCs, other blockholders, and officers and directors) when pricing the IPO.

Keywords: Initial public offerings, equity valuation, insider ownership, investment banker prestige, new economy

JEL Classification: G12, G32, M41, G24