The use of the comparable firm approach in valuing Australian IPOs |
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Authors: | Janice How Julian Yeo |
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Institution: | a Department of Accounting and Finance, University of Auckland Business School, New Zealand b Merrill Lynch Equities, Australia c Columbia Business School, United States |
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Abstract: | Despite the difficulty of finding comparable firms in a less populated market, we provide evidence on the usefulness of the comparable firm approach using 275 Australian industrial IPOs from 1993 to 2000. We show that, without adjustments, IPO price-earnings (P/E) and market-to-book (P/B) multiples based on management forecasts of earnings and book values of equities provided in prospectuses are strongly associated with the average P/E and P/B multiples of two comparable firms (matched on industry, growth and size). Additional tests show that the value estimated using the comparable firm approach (in the form of a P/V ratio, where P is the offer price and V is the estimated firm value) is associated with IPO underpricing. |
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Keywords: | G12 |
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