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An Empirical Analysis of the Implicit Growth Rate for Industrial IPOs Listed in Pakistan

Author

Listed:
  • Muhammad Zubair Mumtaz

    (Assistant Professor, School of Social Sciences and Humanities, National University of Sciences and Technology, Islamabad)

  • Zachary Alexander Smith

    (Adjunct Professor, Donald R. Tapia School of Business, Saint Leo University, USA)

  • Ather Maqsood Ahmed

    (Professor, School of Social Sciences and Humanities, National University of Sciences and Technology, Islamabad)

Abstract

This study examines the cash flow growth rate implicit by offer prices of industrial IPOs using a reverse engineering DCF model. In addition, this study also investigates the bias of implicit growth relative to the realised growth rate by considering 19 IPOs listed on Karachi Stock Exchange during the period from 1995 to 2008. We find that the estimated growth in cash flows is slightly higher than realised growth rate, which indicates that the median IPO firm is overvalued by 61.5 percent at the offering. It is observed that 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 employing a buy-and-hold investment strategy. The policy implication of the study is to evolve a price discovery mechanism by the Securities and Exchange Commission of Pakistan which may help to reduce the overvaluation of IPOs upto some extent.

Suggested Citation

  • Muhammad Zubair Mumtaz & Zachary Alexander Smith & Ather Maqsood Ahmed, 2016. "An Empirical Analysis of the Implicit Growth Rate for Industrial IPOs Listed in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(1), pages 15-28.
    • Handle: RePEc:pid:journl:v:55:y:2016:i:1:p:15-28
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    References listed on IDEAS

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    More about this item

    Keywords

    Initial Public Offerings; Reverse Engineering DCF Model; Valuation; Growth Rate;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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