Hostname: page-component-7c8c6479df-ws8qp Total loading time: 0 Render date: 2024-03-28T21:54:23.262Z Has data issue: false hasContentIssue false

What a Difference a Month Makes: Stock Analyst Valuations Following Initial Public Offerings

Published online by Cambridge University Press:  06 April 2009

Joel Houston
Affiliation:
houston@ufl.edu, University of Florida, Warrington College of Business, Department of Finance, Gainesville, FL 32611.
Christopher James
Affiliation:
christopher.james@cba.ufl.edu, University of Florida, Warrington College of Business, Department of Finance, Gainesville, FL 32611.
Jason Karceski
Affiliation:
jason.karceski@cba.ufl.edu, University of Florida, Warrington College of Business, Department of Finance, Gainesville, FL 32611.

Abstract

We examine how analysts establish target prices for IPO firms and whether comparable firms used to support target prices are helpful in explaining IPO offer prices. During the bubble period of 1999 to 2000, the average offer price was set at a discount relative to comparable firm valuations. In contrast, the average offer price was set at a small premium relative to comparables in the pre-bubble period. This shift appears to hold even after controlling for the differences in the types of firms going public during the bubble period. Moreover, target prices of IPO firms were set at a higher premium relative to comparables during the bubble period. While our results suggest that underwriters systematically discounted offer prices during the bubble period, an alternative explanation is that the shift arose because underwriters and analysts faced different incentives and legal exposures during the bubble period.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aggarwal, R. K.; L. Krigman, L.; and Womack, K. L.Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling.” Journal of Financial Economics, 66 (2002), 105–137.CrossRefGoogle Scholar
Asquith, P.; Mikhail, M. B.; and Au, A. S.Information Content of Equity Analyst Reports.” Journal of Financial Economics, 75 (2005), 245282.CrossRefGoogle Scholar
Barber, B; Lehavy, R.; McNichols, M.; and Trueman, B.Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns.” Journal of Finance, 56 (2001), 531563.CrossRefGoogle Scholar
Bradley, D. J., and Jordan, B.Partial Adjustment to Public Information and IPO Underpricing.” Journal of Financial and Quantitative Analysis, 37 (2002), 595616.CrossRefGoogle Scholar
Bradley, D. J.; Jordan, B.; and Ritter, J. R.The Quiet Period Goes Out with a Bang.” Journal of Finance, 58 (2003), 136.CrossRefGoogle Scholar
Brav, A., and Lehavy, R.An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long Term Dynamics.” Journal of Finance, 58 (2003), 19331968.CrossRefGoogle Scholar
Chemmanur, T. J.The Pricing of Initial Public Offers: A Dynamic Model with Information Production.” Journal of Finance, 48 (1993), 285304.CrossRefGoogle Scholar
Cliff, M. T., and Denis, D. J.Do IPO Firms Purchase Analyst Coverage with Underpricing?Journal of Finance, 59 (2004), 28712901.CrossRefGoogle Scholar
Damodaran, A.The Dark Side of Valuation: Valuing Old Tech, New Tech, and New Economy Companies. Upper Saddle River, NJ: Prentice Hall (2001).Google Scholar
Kaplan, S. N., and Ruback, R. S.The Valuation of Cash Flow Forecasts: An Empirical Analysis.” Journal of Finance, 50 (1995), 10591093.CrossRefGoogle Scholar
Kim, M., and Ritter, J. R.Valuing IPOs.” Journal of Financial Economics, 53 (1999), 409437.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?Review of Financial Studies, 15 (2002), 413443.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.Why Has IPO Underpricing Changed over Time?Financial Management, 33 (2004), 537.Google Scholar
Lowry, M., and Schwert, G. W.IPO Market Cycles: Bubbles or Sequential Learning?Journal of Finance, 57 (2002), 11711200.CrossRefGoogle Scholar
Lowry, M., and Schwert, G. W.Is the IPO Pricing Process Efficient?Journal of Financial Economics, 71 (2003), 326.CrossRefGoogle Scholar
Ljungqvist, A., and Wilhelm, W. J. JrIPO Pricing in the Dot-Com Bubble.” Journal of Finance, 58 (2003), 723752.CrossRefGoogle Scholar
Purnanandam, A., and Swaminathan, B.Are IPOs Really Underpriced?Review of Financial Studies, 17 (2004), 811848.CrossRefGoogle Scholar
Tinic, S. M.Anatomy of Initial Public Offerings of Common Stock.” Journal of Finance, 43 (1988), 789822.CrossRefGoogle Scholar