IPO Valuation in the New and Old Economies

Abstract

We examine the valuation of accounting variables, growth opportunities, and insider retention for a sample of 1,625 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). Specifically, we test for valuation differences in the boom and crash relative to the more stable 1980s. Additionally, we investigate whether accounting variables, growth, and insider retention of technology IPOs and internet IPOs are valued differently. Our major findings are as follows. For profitable non-tech firms in the 1980s, income, sales, R&D, industry price-to-sales comparables, and insider retention are positively related to offer values. In the boom period, relative to the 1980s, income, industry comparables, and insider retention are valued more. Sales, book value of equity, and R&D are valued less. The finding on income is surprising and contrary to claims made in the financial press. In the crash period, relative to the 1980s, income is valued more, but R&D and industry comparables are valued less. We also document that, relative to the boom period, crash period sales were valued more, whereas insider retention and industry comparables were valued less. Relative to non-tech firms, tech firm earnings and insider retention are valued more, but their sales and R&D are valued less. Internet firms' sales are valued less; but their income, book value, and insider retention are valued more. We also investigate whether first-day investors and investment bankers agree on the weights assigned to income, book value of equity, sales, R&D, industry comparables, and insider retention. We find that while the two groups value accounting variables and growth proxies differently, these differences are not economically important for the most part. With respect to insider retention, first day investors valued it less in the 1980s and during the crash period and more in the boom period, than do investment bankers. Additionally, investors value insider retention of tech, internet, and loss firms more than do investment bankers. First-day investors assign lower valuations to tech firms, internet firms, and loss firms than do investment bankers.

Keywords: Initial public offerings, equity valuation, accounting data, insider ownership, new economy

JEL Classification: G1, G32, M41