Relative Valuation of Penny Stock IPOs
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School of Business |
Master's thesis
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Date
2017
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Mcode
Degree programme
Finance
Language
en
Pages
67
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Abstract
Purpose of the study I study the valuation of penny stock IPOs relative to matching peer companies. The topic is motivated by the fact that previous relative valuation studies explicitly screen out small-priced issues. At the same time, several non-valuation studies conclude that there are significant differences between penny stock IPOs and ordinary IPOs in other aspects. Thus, my objective is to test whether previous results on IPO valuation are valid for penny stocks, too. In addition, I examine the relation between IPO valuation and after-market performance. Data and methodology My main sample includes 171 penny stock IPOs listed on London Stock Exchange Alternative Investment Market. The data set covers the time period from 1st of January, 1997 to 31st of December, 2015. Initial listing data is collected from Thomson Reuters SDC. It is supplemented by accounting and market data from Thomson ONE Banker and DataStream databases. For each penny stock IPO, I find a comparable listed company and a comparable IPO company based on industry, size and profitability. I compare valuation levels of the companies by using several commonly used valuation multiples, such as Price-to-Earnings (P/E) and Enterprise Value-to-EBITDA (EV/EBITDA). Findings Consistent with prior empirical evidence on ordinary IPOs, I find that penny stock IPOs are significantly overvalued relative to listed peer companies. The overvaluation ranges from 37% to 57% depending on the valuation multiple used. Still, penny stock IPOs are less overvalued than ordinary IPOs. My results show that the most overvalued penny stock IPO companies exhibit the highest first-day returns and are able to sustain the high valuation level during the first six months following an IPO. In longer time periods they underperform compared to other penny stock IPO companies. Profitability of penny stock IPO companies significantly declines post-IPO. This combined with poor long-term stock price performance suggests that IPO investors’ expectations are not met ex-post.Description
Thesis advisor
Kaustia, MarkkuKeywords
penny stock, initial public offering, IPO, relative valuation, overvaluation, multiples