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Is Growth Rate Implicit In Ipo Prices ?

Author

Listed:
  • 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.)

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.

Suggested Citation

  • Muhammad Zubair Mumtaz & Zachary Alexander Smith, 2015. "Is Growth Rate Implicit In Ipo Prices ?," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 70-89, December.
    • Handle: RePEc:rjr:romjef:v::y:2015:i:4:p:70-89
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    References listed on IDEAS

    as
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    Cited by:

    1. Abdul WAHID & Muhammad Zubair MUMTAZ & Edmund H. MANTELL, 2020. "Short-Run Pricing Performance of Local and Dual Class IPOs in Alternative Investment Market," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 57-74, March.

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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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