Agga Rwal

The Impact of Fundamentals on IPO Valuation Author(s): Rajesh Aggarwal, Sanjai Bhagat and Srinivasan Rangan Source: Financial
Management, Vol. 38, No. 2 (Summer, 2009), pp. 253-284 Published by: Wiley on behalf of the Financial Management Association International Stable URL: http://www.jstor.org/stable/40388672 . Accessed: 24/01/2014 02:18
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The Impact of Fundamentals on IPO Valuation

Rajesh Aggarwal, Sanjai Bhagat, and Srinivasan Rangan*
howinitial has changed overtime Weexamine on (IPO) valuation publicoffering byfocusing 1997 toMarch2000 (designated time as theboom three January period), periods:1986-1990, 2001 (designated as thecrashperiod). Usinga sampleof 1,655 and April2000 to December havehigher with more valuations than dofirms with IPOs, wefindthat negative earnings firms andfirms with more havehigher valuations than less negative positive earnings earnings firms Our results thatnegative are a proxy with lesspositive suggest earnings forgrowth earnings. and that suchgrowth are a significant forInternet firms options component ofIPO opportunities value. firm
of initial Valuation (IPOs) occupiesan important place in finance, perhaps publicofferings their first to value a because an IPO provides participants opportunity publiccapitalmarket an economic of IPOs is also quiterelevant from assets.Valuation set of corporate efficiency that of such(usually theIPO is thefirst opportunity managers young)companies perspective; Such signalscan either affirm or thepubliccapitalmarkets. pricesignalsfrom getto observe future whichhave beliefsregarding thefirm's growth opportunities, management's repudiate andcorporate realeconomic for obvious (i.e.,employment investment). activity implications in thepopular interest ofIPOs in thelate 1990shas generated Thevaluation significant press in IPO valuation in thepopular interest in addition to thefinancial press.Partofthereasonfor in In the "new latter half of the thelate 1990swas thepublic'sinterest the 1990s, e-conomy." andInternet market stock powered bytechnology companies unprecedented gains, experienced caused several commentators 2003). These enormous pricesurges (see Ofekand Richardson, in thisperiod. valuation methods remained valid traditional aboutwhether to raisequestions in a Chief of this concern statement an example by Jerry Kennelly, (1999) reports McCarthy in the to value a like is not ofInktomi, Officer Financial key company this." "Early profitability of For Gove "But in context IPOs. common the more were Suchclaims (2000) remarks, example, if 'It's as As told on feel. one based gut arejustas often valuations everybody entrepreneur me, with.'" arecomfortable that on a number they justsettles inthe valuation ofIPOs in there were shifts andtowhat weexamine Inthis extent, whether, study, two a of IPOs the of Weconsider valuation sample 1,655 theneweconomy during distinct period. The of two distinct choice the and 1997-2001. periods (hereafter, 1980s), periods:1986-1990 in IPO the neweconomy. in valuation forourstudy is motivated by ourinterest understanding to it. Duringthelate 1990s, characterization and industry has a temporal This new economy ofthis inthevanguard new with were an Internet those focus, especially technology companies,
at theLondon FinanceAssociation at theAmerican comments theconstructive Wegratefully meetings, acknowledge and ofan anonymous Business Schoolseminar, referee. * MN. at theCarlsonSchool ofManagement, is a Professor Minneapolis, ofMinnesota, University RajeshAggarwal CO. Srinivasan at theLeeds SchoolofBusiness, Boulder, Rangan University ofColorado, Sanjai Bhagatis a Professor CO. at theLeedsSchoolofBusiness, Boulder, is a Visiting University ofColorado, Professor 284 253 2009 Summer FinancialManagement pages
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FinancialManagement Summer2009
IPO allowsus to construct a baseline "traditional" IPOs during 1986-1990 economy. Examining of in book value valuation model.The variables we include ourmodelareincome, sales, equity, andinvestment insider research anddevelopment retention, ratio, (R&D), industry price-to-sales banker prestige ranking. We thencompare thenew economy thisvaluation modelwiththevaluation period, during in March2000, stock of and other markets 1997-2001. Giventhedramatic collapse NASDAQ someobservers that themarket for neweconomy andespecially haveargued IPOs, was stocks, into the 1997-2001 altered March break down after 2000. we Therefore, significantly period We label these twosubperiods, to 2000 to December 2001. 1997 March 2000 and January April as theboomand crashperiods, between We also investigate valuation differences respectively. and Internet non-Internet and and companies. technology nontechnology companies, the We use thevaluation modelof Abel and Eberly(2005), whichexplicitly incorporates to our choice of that a new motivate firms to or technology, possibility mayupgrade adopt the In the firm three variables. their the value of model, 1) components: explanatory comprises valueof thefirm's costof thefirm's expected replacement 2) thenetpresent physical capital, with future associated future cashflows from assetsinplace,and3) thevalueofgrowth options the firm is to a The in model is how close their technological technological upgrades. keypoint offirm valuewillbe reflected Thecloser is toa technological the more thefirm upgrade. upgrade, inthetechnological in existing andless willbe reflected physical capital upgrade growth option or(positive) firm cashflows. ofrapid Becausethelate1990swerea period change, technological of this modeloffirm determinants valuation seemsparticularly wellsuited to capture thesalient value. Becausewe do notdirectly that observe we use several should technological proxies upgrades, be consistent withfirms the We that Internet undergoing technological upgrades. hypothesize was one ofrapid Internet firms that weregoing period generally technological upgrades. public almost in that for these a This would were, bydefinition, engaging technological upgrade. imply there were few assets in few the and firms, and, existing place using existing technology projects little cashflow. we hypothesize arelikely that firms with tobe hence, Second, negative earnings inmarket other couldalso be investing in,among investing things, upgrades technological (they other third and As a we share, measure, organizational capabilities, assets). advertising, intangible consider R&D spending toalsobe a form ofexpenditures associated with technological upgrades. Wefind that the costofphysical for IPO valuation matters replacement (bookvalue)only capital thecrash consistent with thenotion that orphysical assetsbecamemore during period, tangible after the IPO bubble For future cash from assetsin place, flows important popped. expected we findthat incomeof IPO firms is weighted moreand sales are weighted less whenvaluing IPOs in theboomperiod as compared to thelate 1980s.Thisresult in is contrary to anecdotes thefinancial Our for In are somewhat mixed. press. findings growth options general, proxies for suchas R&D spending orindustry areassociated growth options price-to-sales comparables with IPO firm value.Somewhat of growth thesemeasures arenot greater surprisingly, options with correlated value in more the boom or in Internet or tech firms. consistently highly period we find that with firms for have Instead, larger negative (another earnings proxy growth options) valuations. higher Wenote that sizesinmany studies aresmall, basedononeindustry or sample prior (theinternet) consider IPOs with limit the of their conclusions. and, thus, only positive earnings generalizability Inthis weconsider the valuation ofIPOs with andnegative Whereas paper, positive earnings. only about 20% oftheIPOs during 1986-1990 hadnegative 63% of IPOs 1997-2001 earnings, during hadnegative oftheIPOs during 1999hadnegative and 85% earnings. Eighty percent earnings, of theIPOs during 2000 had negative and more the earnings. Additionally, perhaps important, data suggest thatIPOs withnegative are with than correlated value IPOs earnings differently
Bhagat, & Rangan Impactof Fundamentalson IPO Valuation Aggarwal,
255
Whileincomeof IPOs withpositive is correlated withvalue withpositive earnings earnings. with with income of IPOs is correlated value As negative earnings positively, negatively. a result, firm between valueandearnings. Firms with there relation more is a V-shaped negative earnings with with valuations than firms lessnegative with areassociated consistent these higher earnings, in investments valuable inference based Thus, growth options. negative earnings representing an incomplete ofIPO valuation. with on firms earnings provides picture only positive has shownthatownership retention has a by pre-IPOshareholders Finally, priorresearch firm with the on consistent model of Leland and While value, Pyle(1977). impact significant offirm we also extend this for this determinant research value, bystudying important controlling oftheownership ofdifferent classesofshareholders, suchas CEOs, other thevalueimplications 1 wefind andother blockholders. that investment venture anddirectors, officers Indeed, capitalists, different to of different classes investors andfirst-day bankers weights ownership signals assign IPOs. when shareholders of valuing to the restof thepaper,a fewwordsaboutthe scope of thispaper is in Beforeturning that andprominently valuations thelate 1990s,thepopular order. argued pressregularly During valuation" has been This wereirrationally of companies phenomenon "irrationally high high. South of the 17th 16th and the Sea bubble of the the mania to century. century tulip compared for IPOs has andhowthevaluation function whether inthis is tounderstand Ourobjective study or irrational reflect rational in thevaluation function theseshifts overtime.Whether changed In ofthe is a that we do not investors bankers and/or investment explore. light subject by pricing a market would be in the late valuations market 1990s,evaluating efficiency very relatively high in valuation is a useful shifts we believethat describing systematic topic.However, interesting ofefficiency. examinations should first precede stepthat theprior section reviews literature Thenext is organized as follows. ofthepaper Theremainder results estimation issues. Our are In we discuss Section IPO valuation. on II, presented empirical with a summary. concludes section III. The final in Section
I. Extant Literatureon IPO Valuation

A. Corporate Ownership Structureand IPO Valuation is valueof thefirm thecurrent modelin which Lelandand Pyle(1977) proposea valuation firm the the of retained tothepercentage equity related taking public. by entrepreneur positively cash flowsof the knowsmoreabouttheexpected In their model,theentrepreneur signaling in the to retain shares it is costly fortheentrepreneur investors. firm than do potential Further, his/her of the benefits firm becausebydoingso he/she personal portfolio. diversifying foregoes that information ifhe/she hasprivate intheIPO only willretain shares he/she expected Therefore, that themodelimplies tobe high. arelikely cashflows Thus, bypre-IPO ownership greater equity to the aboutthecompany's confidence sendsa credible shareholders prospects signalof their IPO values. to and leads to and banker investment investors, higher potential for this butnotmutually an alternative, Moralhazard exclusive, positive explanation provides with thoseof incentives stock this Under relation. alignsmanagerial ownership perspective, and workharder withhighlevels of stockownership shareholders; managers consequently, and IPO in the investors New flows. cash this, therefore, high-ownership anticipate higher generate firms. than firms arevaluedmore low-ownership
of of different of theimpact a richanalysis types (2003) and Li and Masulis(2006) provide ^jungqvistand Wilhelm onIPO valuation ofshareholders ofdifferent oftheimpact Weviewouranalysis onIPO underpricing. shareholders types andLi andMasulis. andWilhelm, inLjungqvist totheanalysis as complementary
256
is based retention A third IPO valuesandpost-IPO for a positive relation between explanation on the assumption of a downward-sloping demandcurveforshares(Ofek and Richardson, shares availablefortrading. retention fewer thisassumption, levelsimply 2008). Under higher increases. a and their shares become scarce price commodity Consequently, andSimunic DownesandHeinkel (1991),among (1982),Ritter (1984),andFeltham, Hughes, withthe In consistent the of retention. evidence on value others, general, provide ownership IPO and valuation a relation between theoretical these studies document positive predictions, whether different In a further retention. this we typesof study, go step ownership by asking other blockholders have and owners other officers and venture directors, CEOs, capitalists, differential on IPO valuation. impacts B. Valuation of Accounting Data the valuerelevance ofaccounting While havebeennumerous that haveinvestigated there papers a haveconducted information forpublicly traded there havebeenveryfewpapersthat stocks, are IPO firms. These detailed of the relevance of information for briefly papers study accounting reviewed below. dateand at Klein(1996) examines therelationship between thepricepershare(at theoffer a sampleof 193 IPOs with theendofthefirst andvarious variables for positive dayoftrading) is related . that share income from the 1980 1991 She finds the to positively price per pre-IPO year of topre-IPO share and book value share.2 per per earnings pre-IPO equity KimandRitter firm-level thecorrelation between (PE) ratios (1999) investigate price-earnings andtheindustry-median PE ratios fora sampleof 190 IPOs that had positive pre-IPOincome PE andcompleted intheyears1992and 1993.Theydocument that firm-level andindustry-level ratios arepositively R2 oftheir model's related butthat theadjusted is only5%. Their regression when ofpreforecast for the next instead consider explanatory power improves year they earnings IPO historical that basedonhistorical earnings. Theyconclude accounting industry comparables information areoflimited valuefor IPO pricing. understanding Inan insightful Purnanandam andSwaminathan theoffer paper, (2004) compare price-to-sales, offer to EBITDA (earnings before andamortization) andoffer interest, taxes, price depreciation, of a sampleof2,288 IPOs during hadpositive IPOs that 1980-1997; priceto earnings pre-IPO EBITDA with similar valuation ratios ofindustry find peers.Interestingly, they usingtheabove valuation that metrics IPOs tendto be overvalued. moreovervalued Also, in thecross-section, IPOs havelower andhigher forecasts. accruals, profitability, higher analyst growth KimandRitter on relative andSwaminathan valuation (1999) andPurnanandam (2004) focus of IPOs thathave a positive recent and Houston, James, pre-IPOincome.In another paper, Karceski therelative ofa sample of 153 IPOs during valuation 1996-2000. (2006) also consider As noted IPO valuations, in thelate 1990sandearly above,whenanalyzing 2000,it especially wouldbe inappropriate to excludeIPOs with from thesample.In thispaper, negative earnings we consider thetotal offer valueofIPOs with andnegative positive earnings. C. InternetIPO Valuation Studies Motivated in Internet interest in thelate 1990s,several valuations studies have bythepopular to understand the valuation of Internet in general. Of thesestudies, Hand attempted companies andSeethamraju valuation around theIPO date. Mohanram, (2003) andBartov, (2002) examine
and Thompson thevaluation of IPOs with and bookvalueof Riffe, 2Beatty, (2000) consider positive pre-IPOincome for theyears1987-1998. equity
Bhagat, & Rangan Impactof Fundamentalson IPO Valuation Aggarwal,
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theyears1997-1999whoseprea sampleof 116 Internet IPOs from Hand (2003) examines before is and income items is negative. bookvalueofequity positive income nonrecurring Using he finds that IPO valuation on offer and a logarithmic (based price first-day specification, closing related tothepre-income bookvalueofequity, butnegatively andlinearly and price)is positively before items. Hand documents that offer related to income valuesare nonrecurring concavely with inR&D andmarketing wouldbe consistent theargument andconcave costs;this increasing and not and costs are assets R&D that intangible period expenses. marketing large of 98 Internet and Seethamraju IPOs and Mohanram, Bartov, (2002) focuson thevaluation non-Internet IPOs that were 1996-1999. For size-matched and 98 offer-date completed during and sales are related to offer find that cash Internet sales, flows, IPOs, they growth significantly bookvalueof equity, and dateand at theoffer date).In contrast, earnings, prices(at thefiling flows to offer Cash and not a association bear significant R&D per sharedo prices. earnings - when arepositively with offer arepositive, related relation bearan asymmetric they they prices are related to These are are whenthey negative, to offer prices. they negatively findings prices; are related to non-Internet offer cash For similar to ourresults. IPOs, earnings, prices positively withanyof the relation and sales,butfirst-day flow, closingpricesdo notbear a significant variables. financial firms ofpublicly traded thelate 1990sandearly thevaluation examine studies Several during the of a valuation modelin and Buskirk 2000. Core,Guay, power (2003) compare explanatory to for a cross-section of earlier relative theneweconomy publicly years large (1995-1999) period inthenew oftheir modelhas declined whiletheexplanatory that firms. traded power Theyfind their as consistent havenotshifted. modelcoefficients Theyinterpret findings period, economy but volatile around the more uncertain and in new with valuations the traditional, economy being model. valuation stable, Schultzand Zaman (2001) and Ofekand Richardson of Internet In thecontext valuations, ofInternet IPOs werefar valuations in the late that evidence 1990s,thepost-IPO (2003) provide Demers and Lev stocks. traded of seasoned than those Also, (2001) andKeating, publicly greater March2000. stocks before and after of Internet the valuation Lys,andMagee (2003) compare the the of IPO. of IPOs at time the valuation examine is to Ourfocus, bycontrast,
II. IPO Valuation Model: Empirical Estimation Issues and Hypotheses

A. Choice of Dependent Variable: Price-Earnings Ratio, OfferPrice, Value? or Total Offer ofthe is the model ofanIPO valuation A critical issueinthespecification dependent designation Swaminathan and and Purnanandam Kim and Ritter Some authors, variable. (1999) notably theoffer byearnings closing pricepersharedeflated priceor first-day (2004), havedesignated itleads is that as thedivisor with The variable. problem using as thedependent earnings pershare of the thus values of with offirms totheelimination earnings, reducing generalizability negative to a lesser extent. the value of to book is relevant Thiscriticism also thefindings. although equity, Wereject bookvaluesofequity. hadnegative ofthe1997-2001 pre-IPO sample percent Forty-one for values sales. small no or IPO firms have sales a third extremely sales,becausesome deflator, in the ratio. considerable induces Thissmall-denominator nonnormality price-to-sales problem ratio of distribution ofthecross-sectional theskewness inoursample, Forinstance, price-to-sales is 856.5. is 26.9 andthekurtosis
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A secondcandidate forthedependent variable is theoffer pricepershare.On econometric it distribution. in that has a close to normal theoffer grounds, pricehas attractive properties in is likely to reduce deflation heteroskedasticity regression Additionally, byshares outstanding and empirical residuals. we believethatit is deficient on theoretical First, However, grounds. itsomewhat into investment bankers estimate offer andthen total valuefirst arbitrarily partition between an offer andshares sincemost IPOs have offered. $10 and Second, price price pershare for 1 and willbe large for IPOs with $ 8,earnings pershare poorgrowth opportunities, small firms withgood growth forgrowth Unlessone can completely control opportunities, opportunities. will toward there be an omitted willbias thecoefficient on earnings variable bias that pershare zero. we consider totaloffer value Because it is totaloffer valuethat investment bankers estimate, as variable.3 defined as offer the the shares dependent pricemultiplied by post-IPO outstanding = 10.6, totaloffer withthenonnormality value is afflicted (skewness problem Unfortunately, = 217.4) that with kurtosis as well as the we observe for ratios, heteroskedasticity price-to-sales valueas the Tomitigate weemploy the oftotal offer these dependent problem. problems, logarithm - 0.30.4 ofonly variable. Foroursample, of0.07anda kurtosis offer valuehasa skewness logtotal In addition on to offer we model IPO valuation based also valuation, first-day price-based The difference between value)andtheoffer price prices. closing first-day closing price(market theIPO. However, under canbe considered as theamount theinvestment bankers price bywhich thefocus ofthelevelsofIPO as noted ofthis thedeterminants earlier, paperis on understanding valuesandnotthose ofunderpricing. B. Hypotheses and Empirical Determinantsof IPO Valuation One of theobjectives has of thisstudy is to investigate theIPO valuation function whether inthelate 1990s(theneweconomy) shifted is drawn from two relative tothe1980s.Oursample distinct and 1997-2001. a more Whereas the1986-1990 periods:1986-1990 periodis arguably stable valuation the1997-2001 riseand wascharacterized unusual regime, period bya historically fallin stock market valuations. after a dramatic risein stock andprolonged Specifically, prices inthelate1990s, theNASDAQ andother inMarch stock markets 2000.Thisled some collapsed observers toargue themarket that for neweconomy andespecially stocks, IPOs,wassignificantly altered after March 2000. Therefore, we divide theyears1997-2001 into twosubperiods, January 1997 to March2000, and April2000 to December 2001. We define Boom and twodummies, to these twosubperiods. Boom equalsone ifan IPO was conducted from Crash, corresponding 1997 to March2000, and zero otherwise; crashequals one,if an IPO was conducted January from The coefficients on thetwodummies 2001, and zerootherwise. April2000 to December measure theincremental valuation associated with IPOs in theboomandcrash relative periods tothe1980s. To motivate ourdiscussion of IPO valuation, we use thevaluation modelofAbel andEberly thepossibility that firms to or adopta new (2005), which explicitly incorporates mayupgrade
Consistent withLjungqvist and Wilhelm excludesthesharesrelated to the (2003), thepost-IPOsharesoutstanding overallotment IPOs havean overallotment that allowsunderwriters to option. Aggarwal (2000) notesthat many option selladditional shares size for 30 daysafter theoffering. documents a positive relation up to 15% oftheoffering Aggarwal between theoverallotment andfirst-day returns. In ourvaluation we consider twodependent variables: option regressions, totaloffer valueat theendof first valueplusthefirst-day Our value,andtotalmarket day(which equalsoffer return). conclusions arenotsensitive to thechoiceofthedependent that consideration oftheoverallotment variable, suggesting wouldnotsignificantly ourconclusions. option impact valuation studies have a linearspecification. Hand (2003) provides evidence historically, however, adopted Recently, that thelog-linear modelprovides a better fit than thetraditional linear model.Relatedly, andDichev(1997) Burgstahler andFischer andVerrechia for a nonlinear between market valueandnetincome. (1997) argue relationship
Aggarwal,Bhagat, & Rangan * Impactof Fundamentalson IPO Valuation
259
three In their thevalueofthefirm model, 1) thereplacement comprises components: technology. the the net value of firm's future cashflows costofthefirm's 2) capital, present expected physical associated with future from assetsin place, and 3) thevalue of growth options technological thismodelof Because thelate 1990swerea periodof rapidtechnological change, upgrades.5 to capture thesalient ofvalue. wellsuited determinants seemsparticularly firm valuation ofvaluein theAbel andEberly model. we for thecomponents We needproxies First, (2005) for costofthefirm's assets(mostof our to proxy thereplacement use thebookvalueof equity firm inbook that valueis increasing IPO firms do nothaveanylong-term debt).Wehypothesize flows for most is nontrivial. This future cash the value.Second, companies estimating expected in is known about their forIPO firms less taskis evenmorechallenging giventhat, general, their Instead ofdirectly about future is greater andthere uncertainty prospects. pastperformance these cash we of to discount flows and the cost cash future flows, construct capital estimating flows for cash are sales andnet rates. The two and discount for the cash flows proxies proxies We that firm value the date of the before the end income at hypothesize offering (year 1). year in net income. sales and is increasing The in thecostof capitalaretheboomperiodandthecrashperiod. forchanges Ourproxies increased access to firms had boom the that capital dramatically period, during logichereis riskpremium and that thecostof capitalwas a lowerequity thatinvestors required implying intheboomperiod. firm was higher that valuation wehypothesize As a result, lower. Conversely, thecostofcapital risk the thecrash increased, thereby increasing period, equity premium during in the firm valuation was lower that we hypothesize As a result, accessto capital. andreducing crash period. much ofan IPO's value that critical for IPOs given areespecially Third, opportunities growth our IPO firms: of the to measure four We use them. is basedon 1) opportunities growth proxies the median R&D or Internet firm is a the whether costs,3) firm, 2) price-to-sales technology IntheAbel a firm hasnegative and4) whether IPOs inthesameindustry, ofrecent ratio earnings. to adopt the to andEberly opportunity specifically pertain opportunities (2005) model,growth that firms went Internet and of the defined This a newtechnology. possibility technology many for our first as dummies and include Internet we 1990s. inthelate Thus, proxy technology public a for used R&D as have in and finance studies Several proxy accounting opportunities. growth and andWatts, Janakiraman, 1993;Baber, 1992;GaverandGaver, (Smith opportunities growth Kang,1996).6 from thesameindustry becausefirms for areanother ratios growth proxy Industry price-to-sales variation also Of tohavesimilar tend industry-level capture may they opportunities.course, growth in of the cost such as differences influence that in other factors valuation, capital. Manyof the had crash boom and the that went firms presumably negative earnings, periods publicduring Forinstance, intechnological werestill becausethey (e.g.,R&D expense). capabilities investing in accounting statements was reflected chainmodelthat a newsupply Amazon.com developed Amazon had substantial other of this As a result as "fulfillment negative items), (and expense." areanother ofa technological that Thus, earnings negative upgrade. adoption represented earnings in all of these value is increasing thatfirm We hypothesize of growth measure opportunities. ofgrowth measures opportunities. we consider described variables basedonfundamentals valuation tothefirm In addition above, investment and shareholders retained well. The as variables twoother by pre-IPO ownership
5 assetsinplace ofthevalueoffirm's is a function IPO under-pricing a modelwhere Li, andYu (2005) consider Chung, andthevalueofgrowth opportunities. 6With see Bhagatand Welch(1995), on valuation, and itsimpact of R&D expenditures measurement issuesregarding Lev andSougiannis (1996),andDavid,Hall,andToole(2000).
260
banker can serve as signals ofan IPO's quality. As a result, couldalso be important prestige they determinants oftheIPO's realized we also include these twovariables value.7Forcompleteness, on theright-hand sideofourvaluation function. As withour dependent we applythelog transformation to all of theindependent variable, variables the boom and banker crash insider and dummies, retention, investment except presTo retain of in our we use the values income and book value of tige. negative analysis, equity transformation, /,(.), byHand(2003): proposed L(W) = loge(l + W) whenW > 0 in $millions; L(W) = - loge(l - W) whenW < 0 in $millions. Thetransformation is monotone that whenWis zero andone-to-one andensures L(W) is defined orclosetozero. In light oftheabovediscussion, term ourbasiceconometric valuation modelis (theusualerror is omitted): + a3L(INCBRD)i + a4L(BV)i L(OV)i = a0 + aiBOOMi + c2CRASHi + a5L(SALES)i +a6L(R&D)i + a9IBPRESTi, where OV = theoffer on completion shares ofIPO; pricetime outstanding BOOM = one, if IPO is completed between 1997 and March2000, and zero January otherwise; CRASH = one, if IPO is completed between 2001, and zero April2000 and December otherwise; INCBRD = theincome before items andR&D inyear- 1,where 0 is the extraordinary year IPO year; BV - thebookvalueofequity attheendofyear-1; SALES = thesalesfor year- 1; R&D = theresearch anddevelopment costsinyear- 1; = INDPS themedian ratio ofrecent IPOs; industry price-to-sales INSRET = thepercentage ofthepost-IPO firm owned and shareholders; bypre-offering IBPREST = theinvestment bankprestige ranking The right-hand-side variables in Equation(1) (as well as Equation(2) below) are proxies for future cashflows, anddiscount rates. makestatements growth opportunities, Hence,we canonly aboutthecorrelations of thesevariables withIPO valuations; no causation is implied. We also considered costs as an additional variable that could influence IPO values, butdidnot marketing them dueto dataavailability considerations. Based on a random oftheIPOs incorporate sample for which we havecomplete we that find most IPO firms do notdiscloseseparate amounts data, for costsintheir combine costswith and marketing instead, prospectuses; they marketing general administrative costs.
and Ritter and Wilhelm and Ritter 7Loughran (2004), Ljungqvist Dark,and Singh(1998), and Beatty (2003), Carter, therelation between investment banker andIPO underpricing. LelandandPyle(1977) discuss (1986) consider reputation therelation between insider retention andIPO valuation.
+ a1L(INDPS)i +asINSRETi (1)
Aggarwal, Bhagat, & Rangan Impact of Fundamentals on IPO Valuation
In Equation theaggregate levelsof pre-IPOshare(1), INSRET captures post-IPOretention ofIPO firms At one extreme, structure considerable variation. holders. The ownership displays where a concentrated structures or blockholder we havehighly holdsa sigmanagement single the other we have less of the at concentrated nificant structures end, stock; ownership majority distributed venture and other is blockholders. where among management, capitalists, ownership has different information aboutfuture Becauseeach oftheseclassesof shareholders prospects, levels could affect offer values. from retention Aside informational their differentially ownership to impact havea differential future cash flows and, issues,theseclassesof shareholders ability have a CEOs and other theefforts IPO value. hence, ability, topmanagers greater through they cashflows. Venture to directly affect andblockholders on behalf ofthefirm, capitalists expend a role that is valued investors and couldpotentially byprospective (Megginson play monitoring we also an estimate version of Morsfield and Tan,2006). Therefore, Weiss,1991; expanded INSRET with variables. we where eight (1) replace Equation oftheCEO, ofnon-CEOmanagers as a group, four arepost-IPO Thefirst variables ownership as of 5% blockholders a We a positive as a and other ofventure group. predict capitalists group, IPO next variables and value. The four variables these four between relation post-IPO ownership the time of the around IPO. The are changesin theabove-mentioned ownership percentages not in incremental information contained in the might convey ownership percentages changes of ownership as ownership levels.We definechangesin percentage percentage immediately in percentage of after theIPO. A larger theIPO less thepercentage before change immediately lower confidence future in decrease a regarding ownership signaling implies larger ownership with investors. we predict a outside oftheir interest anda lesser Therefore, alignment prospects, in A decline and IPO value. relation between ownership percentages change percentages negative ofnewshares attheIPO datecouldbe causedbytheissuance (primary offerings) bytheIPO firm investors toprospective shareholders orbythesaleofshares offerings). (secondary pre-IPO bythe on IPO valuation. ofthese twofactors theimpacts We do notdisentangle over Time and across Industries? C. Are the Fundamentals Valued Differently andacross thecrosscoefficients areconstant model that intertemporally (1) assumes Equation to time allow coefficients across to our we IPOs. of section Next, expand vary specification non-Internet Internet and between and between firms, firms, technology nontechnology periods, inwhich wehypothesize instances Ourgoalis toisolate firms. andnonloss lossfirms andbetween Inthecontext oftheAbelandEberly willbe placedongrowth more (2005) model, options. weight to firms closer that are thisimplies technological upgrades. in Equation(1) acrosstime variables in valuation of theindependent To testfordifferences in that variables the with each of seven CRASH and interact BOOM we independent periods, were differfundamentals valued to whether IPO allow us test terms interaction These equation. We more to a stable relative crash in boom and (1986-1990). hypothesize period periods, ently the on growth firm value was moredependent theboomperiod, thatduring options. Duringthe flows from in and cash assets was more firm value crash existing place dependent upon period, technology. inoftechnology that thepercentage Ritter andWelch(2002) indicate tech)firms (hereafter, 1995. to 37% after and 1990s in the 1980s IPO market the 25% of from creased Additionally, early the to29% in2001. To allowfor before bubble theInternet to72% during increased returning they with dramatic these in be associated values could offer differences that cross-sectional possibility firm ornota firm is a tech for whether a dummy oftech intheproportion shifts IPOs,we include for R&D and than other are intensive firms more R&D are firms, payoffs (TECH). Becausetech
261^
262
investments aremoreuncertain than other thosefrom investments (Kothari, Laguerre, tangible those of tobe valuedlessthan andLeone,2002),we expect that andsalesoftechfirms earnings To of TECH with other firms. allowfor we include interactions these INCBRD, slopedifferences, ofTECH with we also include theinteractions SALES,INSRET,andIBPREST. Forconsistency, control variables. BV, R&D, andINDPS as additional In light oftheevidence in Hand (2003) and Bartov, and Seethamraju Mohanram, (2002), we Internet to be firms. we include a dummy IPOs from other valueddifferently Therefore, expect tech As with that if the firm Internet and zero otherwise. one is an firm, (INTERNET) equals we INTERNET with of the seven include interactions of each INCBRD,BV, variables, firms, forincluding theseinteraction SALES,R&D, INDPS, INSRET, andIBPREST. Ourmotivation firms. firms. Wewishtopoint tech firms include Internet terms those for thetech outthat parallel that are The Spearman theInternet is 0.54,suggesting correlation between andtechdummy they distinct areno Internet There is a considerable variables. There firms 1986-1990. overlap during firms are between firms notall technology Internet andtechnology 1997-2001; however, during intheInternet industry. and findevidence thatin stockreturns-earnings Hayn(1995) and Basu (1997) hypothesize onpositive on in absolute valuethan those coefficients are smaller regressions, earnings negative thisis to The are intuition this is that losses less likely persist; earnings. underlying prediction either becausefirms or due to conservative thatsuffer losses are morelikely to be liquidated variable rules. Motivated we define an indicator (LOSS) that equals accounting bythese findings, one if incomebeforeextraordinary and includeit and its itemsis negative, zero otherwise, interaction with INCBRD as additional variables. explanatory Based on theabovediscussion, ourextended modelis + ol2CRASH + a3L(INCBRD)i + a4L(BV)i + a5L(SALES)t L(OV)i = a0 + oLxBOOMi + a6L(R&D)i + omL(INDPS)i+ asINSRETi + otglBPRESTi
16 7 = 10 31 23
+ ^2 ctjBOOMj x Zjr+ ]T a j CRASH j x Zj + ol1aTECHj

7 = 17
+ ]T ajTECHj x Zj + a32INTERNET ) + ]T ÎNTERNET ) x Zj

7=25 7=33
39
+ awLOSSj + a4'LOSSj x L(INCBRD)j4-a^LOSSj x INSRET j,
(2)
whereTECH, INTERNET,andLOSS, respectively, are indicators fortechnology, and Internet, loss firms, Z is thematrix ofthefollowing sevencolumn vectors: composed 1) L(INCBRD),2) L(BV), 3) L(SALES),4) L(R&D), 5) L(INDPS), 6) INSRET,and7) IBPREST,andthex operator represents column-by-column multiplication.
III. Results
A. Sample and Data 1. Sample Construction
We obtain ourinitial for theyears1986-1990 sampleofUS IPOs bynonfinancial companies and1997-2001 from theThomson Financial Securities DataCompany database (SDC). Theinitial
Aggarwal, Bhagat, & Rangan * Impactof Fundamentalson IPO Valuation
263
IPOs with bestefforts oflessthan excludes IPOs ofunits $5 million, offerings, proceeds sample and of IPOs of shares andwarrants, financial andIPOs carve-outs, spin-offs equity companies, with After these we are left 699 IPOs limited from the late 1980s exclusions, partnerships. by thelate1990s.Next, we readtheprospectus ofeachIPO firm and 1,381IPOs from intheinitial IPOs thatare misclassified and eliminate after by SDC. Our finalsample, sampleto identify IPOs that consists of have data these in 1,655 exclusions, complete on all thevariables employed ourregressions.
2. Offering Data
SDC. For IPOs from dateand offer 1986 to 1990,pre-IPO Data on offer pricecome from from For are hand-collected shares andpost-IPO prospectuses. 1997-2001, outstanding pre-IPO wereeither obtained from Professor Alexander at and post-IPOshares outstanding Ljungqvist from We believe that it or hand-collected is to use NewYork prospectuses. important University andWilhelm shares becauseLjungqvist outthat datafor hand-collected (2003) point outstanding inthis intheSDC database. variable errors areseveral there
3. Financial Statement Data
in our analysis:1) sales, 2) incomebefore statement variables fourfinancial We employ Forall oursample and book valueofequity. R&D firms, items, 4) 3) expenditures, extraordinary forthree from thedata forthesevariables we hand-collect years:thefiscalyear prospectuses did date(Year-1) andthetwopreceding theoffering before years(Years-2 and-3). If a firm in themiddle itsoperations of a year, we foran entire nothaveoperations yearor commenced We record book value of forthat variables incomestatement code thethree yearas missing. it.We use pre-issue bookvalueofequity. a firm at theendoftheyearwhenever reports equity bookvaluewouldleadto theIPO issuance, thepost-issue ofcapital from thelargeinflow Given toR&D, ifa firm offer valueandbookvalue.With between relation a mechanical respect reports it equals we assumethat forthat butR&D is undisclosed a fullyearof financial results, year, we cross-checked ourdatawith whenever of error, thepossibility zero.To minimize possible, in of the firms our Data on -1 a for data for Year that sample. proportion high reports Compustat on Compustat. arealways Year-2 andYear-3, however, missing
4. Stock Price and ReturnData
Prices(CRSP), and not CenterforResearchin Security withrecent Consistent research, Data Corporation Securities closingprices.We also obtain (SDC), is our sourceforfirst-day market firm from CRSP.Pre-offering returns andone-year returns market post-IPO pre-offering the15 over market returns onthevalue-weighted returns arebuy-and-hold compounded portfolio arealso buy-and-hold returns date.Post-IPO theoffer returns, weeks)before trading days(three the from the dateofthe the 260 trading over offering. dayafter days beginning daily compounded
5. IndustryPrice-to-Sales Comparables
median to KimandRitter Similar priceto sales is basedon theprice-to(1999), theindustry that havethesame thepasttwoyears recent IPOs most or of the of five fewer salesratios during firm. the IPO code as Classification Industrial Standard (SIC) three-digit
264
6. Ownership Retention
Consistent with Schultz retention andZaman(2001), wemeasure ownership post-IPO aggregate ofpre-IPOshareholders, and after INSRET,as shares secondary outstanding primary offering shares issued/shares and secondary shares arefrom after Data on primary outstanding offering. SDC. We also examine theimpact of ownership of different of pre-offering shareretention types holders. We consider in these around andchanges post-IPO ownership percentages percentages theIPO dateforfour classesof shareholders: and directors 1) theCEO, 2) officers excluding theCEO, 3) venture 5% blockholders. Because SDC provides (VCs), and 4) other capitalists little information on ownership we hand-collect thesedatafrom When structure, prospectuses. of ownership of outside that theoutside diwe excludeshares directors, calculating percentage rector ownson behalf ofVC firms andother refer toboard 5% blockholders.8 Outside directors members whoarenotemployees ofthefirm. VC firms wereidentified thenamesofthepre-offering shareholders disclosed bycomparing intheprospectus with intheannual thelistofVC firms ofthePratt's Guideto Venture volumes Sources To measure VC ownership, theownership weaggregate Capital (1984-2001). percentages heldbyeachVC firm All shareholders that heldatleast5% ofthe shares. outstanding pre-offering whoownatleast5% ofthe firm as other andwhoarenotVCs oremployees areclassified pre-IPO blockholders. As we do for to arrive at a blockholder VCs, we aggregate percentages ownership this number for When ofVCs orblockholders, single category. calculating ownership percentages we include shares heldby outside directors as their on theboard.Whena firm representatives has no VC (blockholder) VC (blockholder) ownership, ownership equalszero. percentage Theabovedetailed dataallowus tomakea unique contribution totheIPO valuation ownership and corporate literature. We are able to examine theimpact of different governance typesof on IPO valuation. shareholders Post-IPOownership and changein ownership different convey about the confidence ofthe shareholder classinthe firm's future signals Also, particular prospects. thefour classesofshareholders havea differential their effort and/or ability through monitoring to impact cashflows future IPO value. and, hence,
7. InvestmentBanker Prestige and IndustryClassification
We use theinvestment banker and theInternet/non-internet, and technolprestige rankings classification as in Loughran andRitter with ogy/nontechnology (2004). Consistent Ljungqvist andWilhelm firms include Internet firms. (2003),technology B. Data Description Table I presents means(Panel A) and medians(Panel B) of the offer year-by-year value, value market variables usedinour first-day closing (hereafter, value),andthemainindependent Medianoffer valuesandmarket valuesofIPOs haveincreased inrecent regressions. considerably relative to the 1986-1990. The median offer value was in million 1990. $77.6 years years By 1998, thisnumber had increased to $147.5 million before in 1999 and shooting up to $291.7 million in2000; itthen $377.9million falls to$321.5million in2001. Themedian industry price-to-sales from 1.7 to 3.0 between 1986 and to 3.9 in 1998before multiple ranged 1990,increased jumping to 31.7 in 1999and39.2 in 2000. In 2001,however, ithaddropped backto 3.0.
8Outside directors ownshares on their ownaccount, andsometimes on behalf ofVC firms orother If 5% blockholders. theoutside director ownstheshare onbehalf ofa VC, we attribute theshares totheVC category. iftheoutside Similarly, director ownstheshare on behalf ofa 5% blockholder, we attribute theshares tothe5% blockholder category.
Aggarwal, Bhagat, & Rangan * Impactof Fundamentalson IPO Valuation
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Aggarwal,Bhagat,& Rangan * Impactof Fundamentalson IPO Valuation
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inthe1980s;however, to $33.6 million from from 1997to Mediansalesranged $26.1 million with in 1999.In2001,the anespecially trend with reverses 2000ithasa declining trend, drop sharp Medianincome before to a relatively sales increasing median large$68 million. extraordinary from to $1.9 million. from inthe1980swas quitesmallandranged items $1.1 million Beginning median income turned The second notedin thefinancial 1998,as was widely press, negative. of firms dataon thefrequency losses in theyear related of PanelC provides column reporting was stableand ranged from 19.6% to went before they public.In thelate 1980s,thisnumber to42.7% andcontinued to increase until 2000 when hadincreased number 22.1%. By 1997,this In 2001,however, this number camedown IPOs were 85% ofthecompleted unprofitable. nearly to about69%. the R&D is zeroorvery close to zero.Thisreflects to PanelB, until1998,median Returning were nontech firms that little or fractions ofthesample that until fact that, spent year, significant inthe1980s,thefrequency oftech in PanelC indicates, column on R&D. As thethird no funds in 1997 and 1998 before increased IPOs was 20.4% to 33.8%. This number firms completing median R&D turns than50% in both1999 and 2000. Consequently, positive becoming greater R&D of techfirms twoyears.In 2001, thepercentage in thelatter dropsto 35% and median a partial R&D levelsfor1999and2000 provide onceagainequalszero.9Thehigher explanation were The years1998-2000 thoseyears. oftheIPOs from lackofprof for theincreased itability IPOs inthose inthehigh ofInternet Thisis reflected oftheInternet. theheady percentage years ofIPOs that thefraction inPanelC. In 2001,however, inthelastcolumn is reported which years, to 5.9%. related wereInternet dropped in the1980s, was stable retention insider of TableI, median to thelasttwocolumns Turning to 81%. After from 73% it increased 70% to 75%; in 1999,however, from moderately ranging banker to 76% in2001. Investment to 82% in2000,itdrops rankings prestige slightly increasing . 1999-2001 andareattheir thesample areaboveeight highest during period, throughout C. Basic Model of IPO Valuation ofoffer value arethelogarithm variables thedependent tworegression TableII reports results; that affect there arethree of first-day and thelogarithm components closingvalue.Recall that assetsin place, 2) cash flows firm value in theAbel and Eberly(2005) model: 1) physical with future associated orassets, and3) growth with associated opportunities technology existing is incontrast this onIPO valuation; hasnobearing that bookvalueofequity Wefind technologies. and Weiss,1997). Since firms traded forpublicly to theprior Maydew, (e.g., Collins, findings assetsin that forIPO firms, forassetsin place,thisfinding bookvalue is ourproxy suggests ofvalue. component placearenotthecritical this to offer values.At first correlated andnegatively is reliably income glance, Intriguingly, Hand cash flows. forfuture becauseincomeis a proxy seemscounterintuitive result However, theselossesreflect firms lose money, whenInternet that that evidence suggests (2003) provides in intangibles, suchas investment or,moregenerally, growth opportunistrategic expenditures thenegative losses are valuedmorepositively. ties.Hence,forthesefirms, Therefore, greater we expand In subsequent withloss firms. be associated on income coefficient analysis, might term forloss firms variable to includea dummy our specification (LOSS) and an interaction to related R&D is positively LOSS and income.As forother between opportunities, growth
aredistinct. these twovariables andR&D is 0.51,suggesting theTECH dummy between correlation So, 9TheSpearman inthat itis notthe R&D expenditures ofthemedian is a determinant ina given oftechfirms thefraction while year, year sole driver.
268
FinancialManaaement Summer2009
Table II. Relation between IPO Values and Time Period Dummies, Accounting Variables, GrowthProxies, InvestmentBanker Prestige, and Insider Retention
in 1986-1990 and 1997-2001. valueis thefinaloffer pricex Offer Sampleof 1,655US IPOs completed theIPO (in $millions). Market valueis thefirst-day number ofshares after closing outstanding immediately date theIPO (in $millions). Boom= 1 iftheoffer ofshares after pricex number outstanding immediately 2000 to is during 1997to March Crash= 1 iftheoffer dateis during 2000,and0 otherwise. April January December as: L(W) = loge(l + W) whenW > 0; L(W) = 2001,and 0 otherwise. Here,L(W) is defined - loge(l - W)whenW < 0. Income andresearch anddevelopment items is theincome before extraordinary B V is thebookvalueofequity inyear- l(in $millions). costsin year-1 (in $millions). Sales is revenues costsin year-1 (in Smillions). at theend of year- l(in Smillions). R&D is research and development is basedon Investment banker Price-to-sales is median ratio. prestige comparable industry price-to-sales retained andRitter ofpost-IPO shares retention is thepercentage by outstanding (2004). Insider Loughran -statistics areinparentheses. shareholders. White pre-offering heteroskedasticity-consistent Independent Variables Intercept Boom Crash (Income) L(BV) (Sales) L(R&D) L(Price-to-sales comparable) Investment banker prestige Insider retention Adjusted/?2 *** atthe 0.01 level. Significant L(OfferValue) -0.77*** (-6.2) 0.79*** (22.1) 0.95*** (17.5) -0.07*** (-5.7) 0.01 (1.4) 0.15*** (10.4) 0.07*** (3.1) 0.07*** (5.5) 0.24*** (23.9) 3.58*** (19.3) 0.743 LjTotal MarketValue) -1.31*** (-8.6) 0.92*** (22.7) 0.90*** (13.7) -0.09*** (-6.0) 0.01 (0.90) 0.14*** (8.3) 0.11*** (3.8) 0. 10*** (6.4) 0.25*** (21.0) 4.31*** (19.3) 0.710
offer values.The other also has theexpected proxy, growth price-to-sales positive comparable, coefficient. TableII also indicates that sales of IPO firms arecorrelated with valuation bythe positively - a one standard underwriter in sales is associated deviation increase (and first-day investors) 10 with a 0.36 standard deviation inoffer values(first-day (0.30%) increase values). Thus, closing thisproxy forcash flowsdoes havethepredicted IPO valuesare positively sign.In addition, related tothetwononfinancial investment andinsider retention banker as well. variables, prestige Wealsofind that IPO values arehigher the boomandcrash relative tothe baseline during periods This couldbe becauseboththeboomand crashperiods had lower costsof period1986-1990.
10See onthecalculation. details Theeconomic oftheother noted variables below, Gujarati (2003) for significance namely, investment banker andinsider retention areofsimilar R&D, price-to-sales comparable, prestige, magnitude.
Bhagat,& Rangan * Impactof Fundamentalson IPO Valuation Aggarwal,
269
This could also result terms thanthelate 1980s.11 from other differences capitalin absolute andthelate1980s.Forexample, weregrowth theboomandcrash between periods opportunities intheboomandcrash as a result, wasthere an incremental nonlinear more and, periods important in valueassociated with thelate 1990s?We nextturn to a further of such increase exploration differences. D. Differencesin IPO Valuation across Time Periods and Industries inTableII constrain thecoefficients ofthefinancial andnonfinancial variables Theregressions andindustries. we relaxthisconstraint andexamine the acrosstime tobe constant Next, periods to on our variables across the coefficients time of vary slope independent periods impact allowing weturn toclarify firms lossfirms. Before toourfindings, wewish one andfor for andInternet tech in will We include variables for the boom that aid of our interpretation. dummy regression aspect loss firms. thebase group consists techandInternet andfor andcrash Therefore, firms, periods, in theyears1986-1990 that areprofitable and that whoseIPO was completed of firms belong on oursevenbasic independent variables book The coefficients industries. to nontech (income, and investment insider are R&D, sales, retention) prestige, industry banking comparables, equity, accordingly. interpreted results for offer valueandfirst-day main ofthe Becausethe the TableIII contains findings paper. for valuealoneandhighlight we discuss results offer for most valuesaresimilar market variables, Recallthat thevaluation model variables. thetwodependent for following onlythedifferences firm in thebookvalueofequity, valueis increasing that ofAbel andEberly (2005), we predict andfuture cashflows. theeffects ofphysical Wepredict andsalesto capture netincome, capital in thecrash to theboom in theboomperiod andlower firm valueis higher that (relative period Wepredict that firm valueis higher over time. inthecostofcapital tocapture differences period) in industries withhigher firms withhigher R&D spending, firms fortechand Internet firms, All of these are for and loss firms. growth proxies opportunities. comparables, price-to-sales to assetsin place, as proxied related results We beginby discussing by book value. From ofIPO value.Forprofitable determinant bookvalueis notan important TableII, we knowthat tonotbe a significant determinant ofvalue. inthelate1980s, bookvaluecontinues firms nontech andtech, for we thedummy variables bookvaluewith Whenwe interact Internet, boom,crash, forthecrashperiod.The result book value is onlymarginally findthat indicating significant with assets theviewthat is consistent for thecrash that bookvalueis significant physical period relative to growth becamemore opportunities. important in to theresults Whencompared of cash flows. therelative we consider Second, importance assetsin place is positively forcash flowsfrom as a proxy nowincome TableII, we findthat inthelate firms nontech to firm value.Thisresult related andsignificantly appliestoprofitable 12Thisis related to firm value. is positively income theboomandcrash 1980s.Forboth periods, firms abovethetech effect. for Internet effect is no incremental butthere for techfirms, also true moreof their value is embodied withtheviewthat is consistent thisresult ForInternet firms, themostsurprising result thenewtechnology. with associated in growth Perhaps opportunities
11 in thelate 1990s,they werearound 6%. Also, 8.5%; whereas, Treasury yieldsin thelate 1980swerearound Ten-year 1999-2000 was thelowest fortheperiod Statesduring in theUnited theequity that Damodaran premium (2006) finds 2.9 % for 2.0% to 2.1% for1999-2000, was in therange theequity 2001,and in the 1962-2005; premium specifically, 1986-1990. 3.6% to4.0% range during 12 inthelate1990srelative tothe with valuations income was associated this that noteabout One interesting result, higher valueindicator that income becamea lessimportant inthefinancial totheassertions itis contrary is that late1980s, press inthenewe-conomy period.
270
Table III. Intertemporal Differencesand Interindustry Differencesin IPO /aluation of Accounting Variables, GrowthProxies, InvestmentBanker Prestige, and Insider Retention
in 1986-1990and 1997-2001. as (W) = Here,(W) is defined Sampleof 1,655US IPOs completed > = W < when when W 0. is final offer value the + 0; loge(l W) (W) -loge(l W) pricex number Offer ofshares after theIPO (in $millions). Market valueis thefirst-day immediately outstanding closing pricex number ofshares after theIPO (in $millions). dateis during Boom= 1 iftheoffer outstanding immediately 1997toMarch dateis during 2000 toDecember Crash= 1 iftheoffer 2000,and0 otherwise. January April Incomeis theincomebefore and development itemsand research 2001, and 0 otherwise. extraordinary costsin year-1 (in Smillions). Sales is revenues in year-1 (in $millions). B V is thebookvalueofequity inyear-1 (in Smillions). R&D is research anddevelopment costsinyear-1 (in Smillions). Price-to-sales and is median is based on Loughran ratio. Investment banker comparable price-to-sales industry prestige Ritter Insider retention is the of shares retained (2004). ering outstanding bypre-off percentage post-IPO = 1 ifa firm shareholders. Loss = 1 ifincome and0 otherwise. Tech before items is negative, extraordinary = 1 ifa firm and0 a technology and0 otherwise. toan Internet Internet belongs industry, industry, belongs in Loughran andRitter otherwise. firms andInternet firms areclassified basedon definitions Technology /-statistics areinparentheses. (2004). White heteroskedasticity-consistent Independent Variables Intercept Boom Crash (Income) (Sales) (BV) (R&D) (Price-to-sales comparable) Investment banker prestige Insider retention Boom* (Income) Boom* (Sales) Boom* (BV) Boom*(R&D) Boom* (Price-to-sales comparable) Boom* Investment banker prestige Boom* Insider retention LjOfferValue) 0.31 (1.5) 0.32 (1.2) 0.60 (1.3) 0.21*** (5.2) 0.22*** (8.3) -0.003 (-0.2) 0.13*** (3.4) 0.07*** (2.7) 0. 15*** (11.2) 2.12*** (6.6) 0.07 (2.0) -0.13*** (-3.9) -0.004 (-0.2) -0.15*** (-3.4) 0.02 (0.6) 0. 10*** (6.4) -0.06 (-0.1) (Market Value) 0.47 (2.0) -0.13 (-0.5) 0.57 (1.0) 0.21*** (4.6) 0.22*** (7.5) -0.003 (-0.2) 0.11*** (2.5) 0.07*** (2.6) 0. 13*** (8.9) 2.17*** (6.0) 0.06 (1.8) -0.1 2*** (-3.5) -0.007 (-0.3) -0.14*** (-2.8) 0.07 (1.7) 0. 13*** (7.4) 0.27 (0.6)
(Continued)
Aggarwal,Bhagat,& Rangan Impactof Fundamentalson IPO Valuation
271
Differencesand Interindustry Differencesin IPO Table III. Intertemporal Valuation of Accounting Variables, GrowthProxies, InvestmentBanker Prestige, and Insider Retention (Continued) Variables independent *(Income) Crash Crash *L(Sales) Crash *L(BV) *L(R&D) Crash *(Price-to-sales Crash comparable) *Investment banker Crash prestige *Insider retention Crash Tech* (Income) Tech* (Sales) Tech*L(BV) Tech*L(R&D) Tech comparable) *L(Price-to-sales Investment banker Tech* prestige Insider retention Tech* Tech Internet *L(Income) Internet* (Sales) Internet *L(BV) *L(R&D) Internet * (Price-to-sales Internet comparable) *Investment Internet banker prestige Insider retention Internet* Internet Loss*(Income) L(Offer Value) 0.08 (2.0) -0.19*** (-5.3) 0.05 (1.9) -0.06 (-1.1) -0. 10*** (-2.6) 0.18*** (5.7) -0.5 1 (-0.9) 0.05*** (2.3) -0.03 (-1.1) -0.02 (-1.3) -0.07 (-1.4) 0.01 (0.6) -0.02 (-0.9) 1.40*** (4.1) -0.86*** (-3.8) 0.02 (0.9) -0.09 (-2.3) 0.03 (1.6) 0.07 (1.6) -0.06 (-2.2) -0.08*** (-2.7) 1.50*** (2.7) -0.03 (-0.1) -0.49*** (-11.3) L(Market Value) 0.08 (1.7) -0.20*** (-4.7) 0.05 (1.9) -0.03 (-0.3) -0. 10*** (-2.1) 0.23*** (5.4) -0.96 (-1.4) 0.07*" (2.7) -0.05 (-1.7) -0.02 (-1.2) -0.02 (-0.4) 0.02 (0.7) -0.01 (-0.5) 1.71*** (4.0) -1.07'** (-3.7) 0.05 (1.3) -0.08 (-2.0) 0.04 (1.9) 0.14 (2.2) -0.10**' (-2.6) -0.09 (-2.2) 2.45*** (3.3) -0.46 (-0.9) -0.48*** (-9.1)
(Continued)
272
Table III. Intertemporal Differencesand Interindustry Differencesin IPO /aluation of Accounting Variables, GrowthProxies, InvestmentBanker Prestige, and Insider Retention {Continued)
Independent Variables
Loss * Investment bankerprestige Loss * Insider retention Loss Adjusted/?2 *** atthe 0.01level. Significant
L(OfferValue)
-0.003 (-0.2) 0.60 (1.6) -0.10 (-0.4) 0.799
L(Market Value)
-0.001 (-0.01) 0.76 (1.7) -0.24 (-0.8) 0.771
to incomeis thatforloss firms, of related in greater value (a coefficient losses result greater in between the loss with the difference coefficients interaction income -0.49). Including explains in greater TableII and TableIII fortheincome term variable. We will discussthisinteraction detail belowwhen for we consider proxies growth opportunities. Sales is oursecondproxy forcash flows; thisis an obviously noisier measure. Forprofitable in thelate 1980s,sales are positively nontech firms and significantly related to firm value. the boom in and crash are valued less. This stands contrast sales Incrementally, during periods, tothefinding that income was valuedmore theboomandcrash andsuggests that during periods, thevariable morecloselyrelated to cash flows(netincome)mattered more.We also findthat saleswerevaluedincrementally less for Internet with theviewthat cash firms, againconsistent flows mattered less for Internet firms andgrowth mattered more. opportunities weconsider our for R&D spending andthe Last, proxies growth opportunities. price-toindustry salescomparable arepositively andsignificantly tofirm related valuefor nontech firms profitable inthelate1980s,consistent with theresults from TableII. Surprisingly, theincremental effect of R&D spending on valuewas negative the boom the incremental effect is during period, although 13This for Internet in firms the market value that the boom positive specification. suggests during werevaluedless highly fornon-Internet firms. The incremental period, growth opportunities effect oftheindustry is the crash andnegative price-to-sales comparable negative during period for Internet firms. Wehypothesize that thevalueofgrowth was discounted opportunities during thecrash as physical becamemoreimportant to firm value.Theseresults accord period capital with theintuition that felloutof favor thecrash relative to "value."We "growth" during period find theresult for Internet firms tobe puzzling. Our finalproxy forgrowth is loss firms. is that loss Here,thenotable opportunities finding firms se do not have it rather is the interaction with firm income that matters. values, per higher Firms that lose more(more havehigher consistent with thefindings of values, negative income) Hand (2003) and Bartov, and for Internet firms. The intuition Mohanram, Seethamraju (2002) is that thesefirms are "investing," butnotin traditional theselosses physical capital.Instead, reflect such as costs and in other investments assets strategic expenditures marketing intangible andgrowth consistent with Klein and and and Ye options, Marquardt (2006) Darrough (2007).
13 for techfirms, neither measure ofgrowth ortheprice-to-sales Surprisingly, opportunities (R&D spending comparable) matters moreforfirm value relative to nontech firms. Even moresurprising is thattechfirms are associated with smaller valuations than nontech firms with a coefficient of-0.86 on thetechdummy in theoffer value unconditionally This lastresult that techitself forgrowth tech specification. suggests Instead, maynotbe a goodproxy opportunities. for howrisky thefirm is. maybe a better proxy
273
In addition totheresults discussed abovethat arerelated totheAbelandEberly (2005) model, in TableIII. Once we include notable other thevarious there are several interactions, findings theboomnorcrashperioddummies alone are significant, in contrast neither to theresults in in thecostof capitalor other to matter arenotshifts TableII. Thus,whatappears unspecified intheprocess theinteraction ofvaluation ofshifts inthecostofcapital perse,butrather changes variables. for both theboom and crashperiods, withother fundamental investment Second, morerelative to thelate 1980s.Thereis no significant mattered in banker difference prestige ofinsider theboomorcrash retention we notethat theimportance insider Third, during periods. both andInternet related tofirm valuefor tech while retention is strongly investment banker firms, for Internet firms tonon-Internet is associated with smaller valuations relative firms. prestige E. Do Different Owners Convey Different Signals to Prospective Investors? intotherelationship insider retention and IPO valuation. between The We nextdelvedeeper III of all in II use the level retention of Tables and shareholders ownership pre-IPO regressions in ownership We nowexamine whether levelsof and changes variable. as an explanatory perdate of classes of shareholders different information to the IPO different around convey centages investors. prospective to detailed structure. statistics related Table IV We beginwithsome descriptive ownership medians of the before and after the means and the ownership percentages presents year-by-year offour inownership classesofshareholders: IPO andthechange 1) CEOs, 2) officers percentages theCEO), 3) VCs, and 4) other blockholders who are and directors as a group(notincluding becausewe norVCs. Numbers forownership neither directors, officers, changesare positive theoffering lesspercentage ofownership after before as percentage ofownership defined change theoffering. in 1987 and 1988, is quitelargein 1986 (34.6%). It declines Mean pre-IPOCEO ownership increasdeclines until trend no discernible exhibits 1998,andthen againin 1999and2000before the officers and directors other than CEO of in mean in The trend 2001. ownership pre-IPO ing at theIPO datefor thesetwo in ownership that oftheCEO. Mean changes mirrors percentages smaller arerelatively classesof shareholders largein 1986 and 1987andbecomeprogressively that levelshavebecomesmaller to thefact thesample over ownership pre-IPO period, reflecting with. start decline overoursample the exhibits a general meanmanagement Whereas period, ownership an trend over the VCs other blockholders of and increasing sample display ownership percentages has increased to was 7.8% in 1986;by2001,thisnumber Mean pre-IPOVC ownership period. in 1986;at theendofoursample held 13.2%,on average, other blockholders 21.7%. Similarly, with theincreasing levelsin to 31.7%. Consistent has increased in 2001,this percentage period, inthemore recent arealso larger these twogroups for years. changes ownership, ownership in the in theownership of IPO firms shift a significant TableIV documents Overall, profile own a In VCs and other blockholders recent the late 1980s. relative to 1997-2001 years, years in less the owns firm and after both before of the IPO fraction contrast, IPO; management greater ofthefirm.14 ofthedetailed toassessthesignificance valuation In TableV, we report ownership regressions to those variables are similar andgrowth on thefinancial thecoefficients In general, variables. ownvariables instead ofaggregate ofthedetailed in TableII; theinclusion ownership reported 15As that we find inferences. our does not retention ownership post-IPO expected, change ership
14 It is also possible IPO firm. morein thetypical are investing venture that Thisdoes notnecessarily capitalists imply invest in. venture firms that from IPOs arecoming that more capitalists 15 the inthisexpanded is that bookvalueofequity Theonly However, specification. significance gainsstatistical change small. remains size ofitscoefficient economically
274
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Aggarwal,Bhagat, & Rangan * Impactof Fundamentalson IPO Valuation
275
rabie V. Relation between IPO Values and Time Period Dummies, Accounting Variables, GrowthProxies, InvestmentBanker Prestige, and Detailed Ownership Variables
in 1986-1990and 1997-2001.Here,L(W) is defined as L(W) = Sampleof 1,655US IPOs completed > = < W when 0. is the final W value offer when + 0; L(W) -loge(l W) Offer price x loge(l W) theIPO (in $millions). Market valueis thefirst-day after ofshares number immediately closing outstanding theIPO (in Smillions). after Boom = 1 if theoffer of sharesoutstanding immediately price x number Crash= 1 iftheoffer dateis during 1997 to March2000, and 0 otherwise. dateis during April January andresearch Incomeis theincome before items 2000 to December 2001, and 0 otherwise. extraordinary BV is the in year-1 (in Smillions). Sales is revenues costsin year-1 (in Smillions). and development R&D is research and development costsin year- 1. (in in year-1 (in Smillions). bookvalueof equity ratio. Investment banker is the median Price-to-sales industry price-to-sales prestige comparable Smillions). is thepercentage of CEO before IPO. and Ritter is based on Loughran (2004). CEO% Before ownership - CEO% is theCEO% Before IPO. CEO% Change ofCEO after is thepercentage CEO% After ownership of officers and directors as a group is thepercentage (butnotincluding ownership Before After. OffDir% and as a group of officers directors is the IPO. OffDir% theCEO) before ownership percentage After VC% IPO. OffDir% theCEO) after Before- OffDir% After. Changeis theOffDir% (butnotincluding of IPO. VC%After is thepercentage before ofVC investors is thepercentage ownership ownership Before - VC% After. Block%Before is thepercentage after IPO. VC% Changeis theVC% Before VC investors ofthecompany orVC investors) before officers anddirectors of5% blockholders (notincluding ownership officers and directors of 5% blockholders is thepercentage IPO. Block%After (notincluding ownership - Block%After. White after IPO. Block%Changeis theBlock%Before orVC investors) ofthecompany in are -statistics parentheses. heteroskedasticity-consistent Independent Variables Intercept Boom Crash (Income) (Sales) L(BV) L(R&D) comparable) L(Price-to-sales banker Investment prestige L(OfferValue) 1.64*** (14.7) .80*** (21.0) .98*** (17.5) -.08*** L(Total MarketValue) 1.57*** (12.2) .94*** (21.7) .95*** (14.1) -.10***
(-5.7)
CEO%Change Change OffDir% VC%Change BlocWo Change

CEO% After
(23.1) -2.33*** (-7.5) -2.00*** (-5.4) -3.45*** (-7.4) - 1.50*** (-5.2)

.76*** (4.2)
.15*** (10.3) .02 (1.8) .11*** (4.1) .08*** (6.0) .26***
(-5.9)
(20.8) -2.52*** (-6.9) -2.38*** (-5.58) -4.73*** (-7.8) - 1.96*** (-6.0)

.80*** (3.7)
.15*** (8.4) .01*** (4.6) .15*** (4.6) . 12*** (6.7) .27***
(Continued)
276
Table V. Relation between IPO Values and Time Period Dummies, Accounting /ariables, GrowthProxies, InvestmentBanker Prestige, and Detailed Ownership Variables (Continued)
Independent Variables After OffDir% VC%After Block%After Adjusted/?2
*** at the0.01 level. Significant
LjOfferValue) .66*** (3.5) 1.26*** (5.7) .89*** (5.7) 0.709
LjTotal MarketValue) .84*** (3.7) 1.76*** (6.3) .99*** (5.3) 0.676
related to offer values.The coefficients classesof shareholders is positively byeachofthefour toVCs andblockholders related ofCEOs andthen ofother arethelargest, followed bythat bythat intheVCs' An increase officers Thesecoefficients anddirectors. areeconomically meaningful. increase with a 0.17 standard deviation deviation is associated post-IPO ownership by 1 standard in theIPO valuation. is An increase in theCEO's post-IPOownership deviation by 1 standard related to a 0.12 standard increase intheIPO valuation. deviation as expected, foreach of thefourshareholder retention Additionally, changesin ownership inretention arenegatively with associated offer valuesimplying that smaller categories changes 16Theestimated leadtohigher values. coefficients arestatistically andeconomically percentages A decreasein thechangein CEO's ownership is retention deviation significant. by 1 standard related to a 0.19 standard deviation in theIPO valuation. A decrease in thechangein increase VCs' ownership retention is related deviation toa 0.18 standard deviation increase by 1 standard intheIPO valuation. we conclude that investment bankers andfirst-day investors Overall, assign different to post-IPOownership and changes in ownership around theIPO of different weights classesofshareholders when theIPO. TheF-statistic totest theequality ofthecoefficients pricing ofthe inownership the levels across four classesofshareholders the changes rejects null.Similarly, theF-statistic to test theequality ofthecoefficients ofthepost-IPO levelsacrossthe ownership four classesofshareholders thenull. rejects F. Robustness Checks We consider thefollowing robustness checksto determine that ourinferences are not eight sensitive to our data definition and empirical we consider three alternate First, methodology. definitions of theboom and crashperiods.1) Boom = 1 if theoffer date is during January 1997to December Crash= 1 iftheoffer dateis during 2001 to 2000,and0 otherwise, January December dateis during 1999toMarch 2001,and0 otherwise; 2) Boom= 1 iftheoffer January Crash= 1 iftheoffer dateis during 2000 to December 2000,and0 otherwise, 2001,and April 0 otherwise; and 3) We redefine theCrashdummy to equal one iftheIPO is from theperiod June 2000 to December IPOs from themonths March2000 to May2000 from 2001,excluding theanalysis. becauseR&D can be viewedas a stock, we also construct an R&D stock Second, variable an amortization from theyearof theinitial assuming periodof three yearsbeginning investment. we define R&D stock as thesumoftwo-thirds ofR&D inYear-1 and Specifically,
16Recall that inownership is defined as percentage before theoffering lesspercentage after change ownership ownership theoffering.
277
weuse salesgrowth inYear-1 as anadditional ofR&D inYear-2. Third, one-third variable proxy for opportunities. growth thelevelof theNASDAQ composite indexand thethree-week we include return on Fourth, to theoffering in Equation(2). Fifth, dateas additional variables thisindexprior independent valuesofoffer we consider theinflation-adjusted bookvalue,sales, value,market value,income, instead ofthelogarithmic inEquandR&D inthevaluation noted Sixth, equations. specification Our conclusions ation(2), we consider a linearspecification. are notsensitive to anyof these andempirical datadefinitions alternative specifications. in ourempirical work that insider retention is exogenous to firm Thusfar, we haveassumed a signaling models suchas LelandandPyle(1977) that rolefor valuation. insider Obviously, posit Ritter that thisis notthecase. Further, outthat a firm that retention (1984) points plans suggest in theIPO wouldhavehigher amount levelsofownership retention ofcapital as to raisea fixed This implies that bothfirm valuation and post-IPOownership increases. levels firm valuation and endogeneity evenseparate determined arejointly variables, endogenous maybe a concern Ifmore exists for investment banker Thesamepossibility thesignaling from prestige. hypothesis. to takepublic, then IPO valuation valuedfirms and investment bankschoosehigher prestigious evenseparate arealsojointly determined variables from investment banker endogenous prestige theissueofsignaling. banker ofinsider retention andinvestment ourseventh theendogeneity for To account prestige, Thedependent variables a system ofthree simultaneous is toestimate check robustness equations. and investment banker The are offer forthethree retention, value,insider prestige. equations ofinsider retention andinvestment banker for that indicate results prestige endogeneity accounting 17In intheoffer valueregression, both insider retention ourconclusions. doesnotalter particular, related andsignificantly toIPO value.Theonly remain banker andinvestment positively prestige offer valueis no longer related to leastsquaresis that ofusingthree-stage significantly impact R&D costs. in valuation is ordinary leastsquares(OLS). research method estimation The mostpopular estimate oflinear model that itis thebestlinear unbiased Theuse ofOLS isjustified bythefact residuals arenormally distributed. Unwhen bestestimate andtheoverall coefficients regression with is theexception than therule, residuals rather with valuation models, normality fortunately, In this OLS may not distributions. outliers ingeneral situation, byfat-tailed generated containing intheclassoflinear estimators. andnonlinear estimator efficient be themost in TableIII are notbeingdriven our theOLS results that to confirm Therefore, by outliers, of quantile method the semi-parametric checkis to employ robustness (or regression eighth and Bassett(1978). As Koenker and was first which robust by Koenker proposed regression), in literature Hallock(2001) note,"Thereis a rapidly empirical quantile regression expanding the case for thevaluebeyond modelsfor makesa persuasive taken as a whole, economics that, robust literature has incorporated mean(OLS)." The finance conditional techniques regression to OLS, which and Samwick, 1999; Chan and Lakonishok, 1992). In contrast (see Aggarwal an estimate ofthemedian valueofthe robust a conditional estimates mean, provide regressions estimates are variables. Coefficient conditional variable uponthesetof explanatory dependent estimators arenonnormal, whenerrors to outliers. notsensitive regression quantile Importantly, 18 leastsquares estimates. efficient than maybe more aremuch that therobust "i-ratios" areinTableVI. Wenote results Therobust larger regression the Thisis because robust for bothspecifications. theOLS -statistics than giveless regressions
17 theauthors. from areavailable Detailsoftheestimation ofthe andHallock(2001) provide andD'Orey(1987),Buchinsky 18Koenker methodological surveys (1998),andKoenker ofthequantile to andapplications issuesrelated approach. regression
278
Table VI. Robust Regression IPO Valuation: Intertemporal Differencesand Differencesin IPO Valuation of Accounting Variables, Growth Interindustry Proxies. InvestmentBanker Prestiae. and Insider Retention
as (W) = in 1986-1990and 1997-2001.Here,(W) is defined Sampleof 1,655US IPOs completed > = < the offer when W W is final when 0. value + 0; (W) -loge(l W) pricex number loge(l W) Offer ofshares after theIPO (in $millions). Market valueis thefirst-day pricex closing immediately outstanding before extraornumber ofshares Income is theincome after theIPO (in Smillions). outstanding immediately in year- 1; items andresearch Sales is revenues anddevelopment costsin year- 1 (in Smillions). dinary BV is thebookvalueof equity in year-1 (in Smillions). and development costsin year RAD is research - 1 (in Smillions). is themedian ratio. Investment banker Price-to-sales price-to-sales comparable industry of post-IPOshares is based on Loughran and Ritter is thepercentage prestige (2004). Insiderretention 1997 to dateis during retained Boom = 1 iftheoffer shareholders. January outstanding bypre-offering and March2000, and 0 otherwise. 2000 to December Crash= 1 if theoffer dateis during 2001, April Tech= 1 if a 0 otherwise. Loss = 1 if incomebefore and 0 otherwise. itemsis negative, extraordinary = 1 ifa firm firm to an Internet a technology Internet and0 otherwise. industry, belongs industry, belongs in contained and0 otherwise. firms to definitions andInternet firms are classified Technology according is notwell specified. ofthisratio andRitter is in parentheses. Distribution Loughran (2004).The"-ratio" Asterisk atthe1% level(minimum) under (*) implies Chebyshev's inequality. significance Independent Variables Intercept Boom Crash (Income) (Sales) (BV) (R&D) (Price-to-sales comparable) Investment banker prestige Insider retention Boom* (Income) Boom* (Sales) Boom*(BV) L(OfferValue) Robust Regression .48*** (13.0) .11 (2.45) .68 (7.6) .23*** (33.0) .20*** (45.0) .01 (4.50) .16*** (19.6) .07*** (12.6) .13*** (43.5) 1.99*** (38.4) .07*** (12.1) - .11*** (-21.2) -.02 (-5.2) L(Market Value) Robust Regression .67*** (15.4) -.17 (-3.3) .39 (3.8) .25*** (30.8) .19*** (36.4) .01 (3.3) .13*** (13.9) .08*** (12.2) .12*** (34.3) 1.96*** (32.5) .06 (8.0) _!!** (-17.0) -.03 (-7.5)
Boom* (R&D)
Boom* (Price-to-sales comparable)
-.17*** (-19.3)
.03 (^2)
-.17*** (-16.1)
.06 (7.7)
(Continued)
Aggarwal,Bhagat, & Rangan Impactof Fundamentalson IPO Valuation
279
Differencesand Table VI. Robust Regression IPO Valuation: Intertemporal Differencesin IPO Valuation of Accounting Variables, Growth Interindustry Proxies, InvestmentBanker Prestige, and Insider Retention (Continued)
Independent Variables banker Boom* Investment prestige retention Boom* Insider * (Income) Crash * (Sales) Crash Crash *(BV) Crash*{R&D) Crash* {Price-to-sales comparable) * Investment banker Crash prestige * Insider retention Crash * {Income) Tech * {Sales) Tech L(OfferValue) Robust Regression .11*** (29.7) .16 (2.5) .09*** (13.8) - . 17*** (-25.7) .01 (3.8) -.09 (-8.5) - .09*** (-12.0) . 17*** (22.3) - .53 (-4.7) .06*** (17.1) - .05*** (-10.1) - .09*** (-13.0) .01 (1.9) - .02 1.55*** (26.5) -.87*** (-21.8) -.01 (-2.5) - .05 (-9.4) .02 (7.7) .07 (8.1) - .05 (-9.7) - .09*** (-16.5) L(Market Value) Robust Regression .14*** (32.2) .30 (4.1) .09*** (10.9) - . 17*** (-22.2) .02 (4.4) -.05 (-4.2) - . 1*** (-11.1) .23*** (25.0) - .71 (-5.5) .05*** (13.1) - .05 (-9.9)
Tech*(BV)
* (R&D) Tech Tech* comparable) {Price-to-sales * Investment banker Tech prestige * Insider retention Tech Tech Internet* {Income) * {Sales) Internet Internet *(BV) Internet* (R&D) * {Price-to-sales Internet comparable) * Investment banker Internet prestige
-.02 (-6.4)
-.02 (-5.6)
- .04 (-5.2) .01 (2.7) -.01
(-5.2)
1.68*** (24.6) -1.02*** (-21.8) .07*** (13.9) - .08*** (-12.3) .04*** (10.9) .15*** (15.6) - .09*** (-14.6) - .09*** (-13.4)
{Continued)
(-2.4)
280
Table VI. Robust Regression IPO Valuation: Intertemporal Differencesand Differencesin IPO Valuation of Accounting Variables, Growth Interindustry Proxies, InvestmentBanker Prestige, and Insider Retention(Continued)
Independent Variables * Insider Internet retention Internet Loss* (Income) Loss * Investment banker prestige Loss * Insider retention Loss L(OfferValue) Robust Regression 1.54*** (16.5) -.12 (-1.9) -.51*** (-70.2) .02 (4.81) .30 (5.2) -.01 (-.2) Number ofsimplex iterations for theta = .1, .25,.5, .75,.9 : 289, 329,335,406, 301 L(Market Value) Robust Regression 2.31*** (21.3) -.42 (-5.8) -.51*** (-60.4) .01 (3.3) .70*** (10.3) -.25 (-5.3) Number ofsimplex theta iterations for = .1, .25,.5, .75,.9 : 254,300,307,357,275
*** atthe 0.01 level. Significant
to outliers in standard result errors that are smaller than thoseof OLS.19 A and,hence, weight secondpoint abouttherobust of -ratios estimates is that thedistribution is notwellspecified. to evaluate thestatistical oftherobust we apply theChebyshev Therefore, -ratios, significance this toanystandard variable with finite random variance inequality; inequality applies regardless ofitsdistributional andsample size (Mood,Graybill, andBoes, 1974).It implies that, properties under thenullhypothesis, theprobability that theabsolute valueofanyrandom variable (in our is greater thanor equal to someconstant k is less thanor equal to I/A:2. For case, the-ratio) theprobability ofobserving a -ratio of 10 ormore is lessthanl/(10)2, or0.01. Overall, example, therobust results arequiteconsistent with ourOLS results inTableIII. regression
IV. Summary and Conclusions

In thispaper, we makethree contributions to theliterature on IPO valuation. theextant First, literature on IPO valuation considers and thislimits thegenonlyIPOs with positive earnings oftheir conclusions. We consider thevaluation of IPOs with andnegative eralizability positive had negative whilefrom earnings. During1986-1990, onlyabout20% of IPO firms earnings, 1997to 2001,63% ofIPO firms hadnegative oftheIPOs during 1999 earnings. Eighty percent had negative and 85% of theIPOs during 2000 had negative earnings, earnings. Additionally, and perhaps moreimportant, thedata suggest that IPOs withnegative are correlated earnings with value than IPOs with Forexample, whereas of IPOs income differently positive earnings. withpositive is correlated withvaluations, incomeof IPOs withnegative earnings positively is correlated earnings negatively.
^Because OLS standard errors arebasedon sumofthesquaredresiduals, outliers "inflate" thestandard error estimates.
Aggarwal,Bhagat,& Rangan Impactof Fundamentalson IPO Valuation
we use thevaluation modelofAbel andEberly Second, (2005), which explicitly incorporates that firms to or adopta newtechnology, to motivate thepossibility ourchoiceof mayupgrade In their thevalueofthefirm three variables. model, comprises components: 1) the explanatory firm's net valueofthe costofthe firm's future 2) the present physical capital, expected replacement with associated future and3) thevalueofgrowth We cashflows, options technological upgrades. with costofphysical IPO valuation find that thereplacement capital(bookvalue)is correlated with thenotion that thecrash consistent orphysical assetsbecamemore tangible period, during theIPO bubble future cash flows, we find that of after income popped.Forexpected important with valuations and sales areassociated withsmaller is associated valuations IPO firms higher is contrary to anecdotes in the to thelate 1980s.This result in theboomperiodas compared financial press. In general, mixed. forgrowth forgrowth are somewhat Ourfindings proxies options options with areassociated IPO firm orindustry as R&D spending such price-to-sales comparables greater arenotconsistently ofgrowth associated thesemeasures value.Somewhat surprisingly, options or techfirms. we findthat in theboomperiodor in Internet valuations withhigher Instead, areassociated with for firms with (another proxy growth options) higher earnings negative larger valuations.20 topostinvestors bankers andfirst-day investment we find that Third, assigndifferent weights theIPO of different classes of shareholders around and changesin ownership IPO ownership when theIPO. Overall, our andofficers anddirectors) blockholders, pricing (CEOs, VCs, other evolvesovertimeis warranted. ofhowIPO valuation examination that a careful results suggest In addition, fundamentals impacton IPO valuation. changeand thishas a direct Obviously, forsignalsof forinvestors affect the inference searching problem changesin fundamentals thatfocuseson forresearch start as a potentially We view ourresults IPO quality. promising differences. these valuation understanding
281^
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The Impact of Fundamentals on IPO Valuation Author(s): Rajesh Aggarwal, Sanjai Bhagat and Srinivasan Rangan Source: Financial

The Impact of Fundamentals on IPO Valuation

Bhagat, & Rangan Impactof Fundamentalson IPO Valuation Aggarwal,

I. Extant Literatureon IPO Valuation

Bhagat, & Rangan Impactof Fundamentalson IPO Valuation Aggarwal,

II. IPO Valuation Model: Empirical Estimation Issues and Hypotheses

Aggarwal,Bhagat, & Rangan * Impactof Fundamentalson IPO Valuation

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Aggarwal, Bhagat, & Rangan Impact of Fundamentals on IPO Valuation

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Aggarwal, Bhagat, & Rangan * Impactof Fundamentalson IPO Valuation

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CEO%Change Change OffDir% VC%Change BlocWo Change

(23.1) -2.33*** (-7.5) -2.00*** (-5.4) -3.45*** (-7.4) - 1.50*** (-5.2)

.15*** (10.3) .02 (1.8) .11*** (4.1) .08*** (6.0) .26***

(20.8) -2.52*** (-6.9) -2.38*** (-5.58) -4.73*** (-7.8) - 1.96*** (-6.0)

.15*** (8.4) .01*** (4.6) .15*** (4.6) . 12*** (6.7) .27***

LjOfferValue) .66*** (3.5) 1.26*** (5.7) .89*** (5.7) 0.709

LjTotal MarketValue) .84*** (3.7) 1.76*** (6.3) .99*** (5.3) 0.676

Aggarwal, Bhagat, & Rangan Impact of Fundamentals on IPO Valuation

Aggarwal,Bhagat, & Rangan Impactof Fundamentalson IPO Valuation

- .04 (-5.2) .01 (2.7) -.01

*** atthe 0.01 level. Significant

IV. Summary and Conclusions

Aggarwal,Bhagat,& Rangan Impactof Fundamentalson IPO Valuation

Bhagat, & Rangan * Impactof Fundamentalson IPO Valuation Aggarwal,

Anda mungkin juga menyukai

osr-r-r^os/">^H fot^r^r-r^mosnoor> (N -i m- co <N

(23.1) -2.33* (-7.5) -2.00* (-5.4) -3.45* (-7.4) - 1.50* (-5.2)

.15* (10.3) .02 (1.8) .11* (4.1) .08* (6.0) .26*

(20.8) -2.52* (-6.9) -2.38* (-5.58) -4.73* (-7.8) - 1.96* (-6.0)

.15* (8.4) .01* (4.6) .15* (4.6) . 12* (6.7) .27***

LjOfferValue) .66* (3.5) 1.26* (5.7) .89*** (5.7) 0.709

LjTotal MarketValue) .84* (3.7) 1.76* (6.3) .99*** (5.3) 0.676