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Valuing Initial Public Offerings Using Article 11 Pro Forma Financial Information in the Prospectus

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  • Jerry W. Chen
  • Jing Zhou

Abstract

We investigate whether Article 11 pro forma financial information assists investors in valuing IPOs. While the SEC expects it to be helpful in assisting investment decisions, Article 11 pro forma financial information is based on registrants' understanding and assumptions, and registrants can exercise their own judgment when preparing pro forma financial statements. It is therefore an empirical question whether the information contained in pro forma financial statements is useful to investors. We examine the association between pro forma adjustments of earnings and book value of equity and the IPO offer value and find asymmetric results. While positive pro forma adjustments of earnings and book value of equity are positively associated with the IPO offer value, negative pro forma adjustments of earnings and book value of equity are negatively associated with the IPO offer value, suggesting that negative pro forma adjustments are priced as growth opportunities. Additional analyses reveal that the association between pro forma adjustments of book value of equity and the IPO offer value varies across different time periods and industries and that pro forma adjustments of book value of equity are initially mispriced by investors. In contrast, we do not find similar results for pro forma adjustments of earnings. Further empirical tests show that the asymmetric results of mispricing of pro forma adjustments of earnings and book value of equity may be explained by the requirements of Article 11 of Regulation S‐X for pro forma adjustments dictating that adjustments to earnings reflect only recurring items while adjustments to book value reflect both recurring and nonrecurring items. Évaluation des PAPE à partir de l'information financière pro forma de l'article 11 contenue dans le prospectus Les auteurs se demandent si l'information financière pro forma de l'article 11 aide les investisseurs à évaluer les PAPE. Bien que la SEC s'attende à ce qu'elle soit utile aux décisions d'investissement, l'information financière pro forma de l'article 11 repose sur les interprétations et les hypothèses des émetteurs inscrits qui peuvent exercer leur propre jugement dans la préparation des états financiers pro forma . L'utilité de l'information contenue dans les états financiers pro forma pour les investisseurs soulève donc une question pragmatique. En analysant le lien entre les ajustements pro forma apportés aux résultats et à la valeur comptable des capitaux propres et la valeur de l'offre des PAPE, les auteurs obtiennent des résultats asymétriques. Si le lien est positif entre les ajustements pro forma positifs des résultats et de la valeur comptable des capitaux propres et la valeur de l'offre des PAPE, il est négatif entre les ajustements pro forma négatifs des résultats et de la valeur comptable des capitaux propres et la valeur de l'offre des PAPE, ce qui semble indiquer que les ajustements pro forma négatifs sont envisagés comme des possibilités de croissance. Des analyses supplémentaires révèlent que le lien entre les ajustements pro forma de la valeur comptable des capitaux propres et la valeur de l'offre des PAPE varie selon les différentes périodes et les différents secteurs d'activité, et que les investisseurs commettent initialement des erreurs dans l’évaluation des ajustements pro forma de la valeur comptable des capitaux propres. En revanche, les observations des auteurs ne sont pas les mêmes dans le cas des ajustements pro forma apportés aux résultats. D'autres tests empiriques montrent que l'asymétrie des erreurs d’évaluation des ajustements pro forma des résultats et de la valeur comptable des capitaux propres peut s'expliquer par les exigences de l'article 11 du Règlement S‐X relatives aux ajustements pro forma selon lesquelles les ajustements apportés aux résultats ne doivent refléter que les éléments récurrents, alors que ceux qui sont apportés à la valeur comptable doivent refléter les éléments tant récurrents que non récurrents.

Suggested Citation

  • Jerry W. Chen & Jing Zhou, 2021. "Valuing Initial Public Offerings Using Article 11 Pro Forma Financial Information in the Prospectus," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 707-739, March.
    • Handle: RePEc:wly:coacre:v:38:y:2021:i:1:p:707-739
    DOI: 10.1111/1911-3846.12608
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    References listed on IDEAS

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