Valuing IPOs : further evidence from Hong Kong

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Valuing IPOs : further evidence from Hong Kong

 

Author: Wong, Siu-mui Louisa
Title: Valuing IPOs : further evidence from Hong Kong
Year: 2001
Subject: Going public (Securities) -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Dept. of Accountancy
Pages: viii, 50 leaves : col. ill. ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1573201
URI: http://theses.lib.polyu.edu.hk/handle/200/96
Abstract: This study examines the valuation of Initial Public Offerings (IPOs) using the comparable firm multiples. IPOs have attracted the attention of many investors and researchers. While many researchers have focused on measuring the accuracy of IPOs's forecast and the short-term underpricing and long run aftermarket performance of IPOs, not much attention has been given to the process of valuing firms which conducted IPOs. This paper intends to fill the gap of examining the pricing of Hong Kong IPOs. The sample used in this study consists of all Hong Kong firms that went public by way of IPOs during the period from 1933-1997 which meet the criteria. I find supportive evidence that IPOs with high comparable firms' multiples have their earnings, book value, or sales capitalized at a higher prices than those of other IPOs. Meanwhile, the empirical results support the argument that better result could be achieved by using the forecasted earnings. Since using the historical Price-earnings (P/E), market-to-book, and price-to-sales multiples of comparable firms without any adjustment only has low predictive ability, I add two variables; the age of the IPOs and the growth rate in order to test the valuation accuracy. By segmenting the sample into young and old firm according to the years of establishment at the time its IPO, I find that older firms are easier to value than young firms. However, the growth rate does not have a significant explanatory role in valuing IPOs in this study. In the second part of the paper, the initial returns and the relationship between initial returns and price-earnings ratio are examined. Numerous academic researches have examined the first day (initial) abnormal returns on the day of IPOs and found positive and significant results. Using IPOs data from Hong Kong during the period 1993-1997, I obtain mean 19.43 first day (initial) returns, which is significant from zero. Price earnings (PE) ratios play an important role in the US equity markets (Bildersee et al. 1990). Firth, 1997 stated that investors apply an "appropriate" PE multiple to forecast profit in order to derive an expected market price when the share goes public. In order to examine the relationship between initial returns and the price-earnings ratio, I use 184 IPOs in Hong Kong during 1993-1997 period. However, the relationship between initial returns and price-earnings is not supported by the empirical results of this study.

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