IPO valuation using peer multiples - Evidence of overvaluation from Europe 1990-2008

Abstract

PURPOSE OF THE STUDY The purpose of this study is to analyze the valuation of European initial public offerings (IPOs) relative to peer group of comparable firms by using price-to-value (P/V) multiples. Furthermore, the intention of this thesis is to study underpricing, short-run abnormal returns, and long-run underperformance in price-to-value valuation context. The objective of the study is threefold. First, I empirically test whether the European initial public offerings are overvalued in relation to their listed peer companies by using various price multiples. Secondly, I examine the relationship between IPO underpricing and valuation results. Lastly, I study possible differences in short- and long-run abnormal returns between under- and overvalued IPOs.

DATA The initial listing data for European IPOs is gathered from the Thomson Financial SDC Global New Issues database, and it has been completed with the financial and secondary market data from the Thomson ONE-banker and DataStream databases. The financial and aftermarket data for peer companies is solely retrieved from the Thomson ONE-banker. After all the limitations, my final sample consists of 614 European IPOs from the time period of 1.1.1990-31.12.2008.

RESULTS My results indicate that European IPOs are systematically overvalued by 60% relative to their industry peers, and the overpricing is significantly highest by about 150% during the “dot-com” boom in years 1999-2000. The results also suggest that investors pay too much information to optimistic growth forecasts and too little attention to current profitability in valuing IPOs which creates unique patterns in IPOs’ aftermarket returns. I find that overvalued IPOs earn 27% (p.a.) higher risk-adjusted abnormal returns than undervalued IPOs during the first six months but earn 40% to 110% lower buy-and-hold abnormal returns on a five-year time scale.