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Comparable firm’s P/E multiple and IPO valuation: an empirical investigation for Indian IPOs

Content Provider	Springer Nature Link
Author	Rajib, Prabina Sahoo, Seshadev
Copyright Year	2013
Abstract	We examine the influence of the comparable P/E (selected on different parameters, i.e., industry, revenue characteristics, book value, and return on net worth) on IPO pricing. The sample comprises of 120 IPOs issued in India during the period 2002–2007. We find that the comparable P/E chosen on the basis of industry alone shows poor estimation power. However, significant improvement in the estimation power of the comparable P/E approach is observed while tapering down the list of comparable firms from the identical industry (affiliating IPO firm) on the basis of revenue characteristics, book value, and return on net worth. We suggest that comparable firms selected from identical industry further adjusted with revenue characteristics and return on net worth provide the most efficient P/E multiple for evaluating IPO price. This paper also finds that IPO price estimated by multiplying current EPS of the IPO firm with benchmark peer group average P/E is positively associated with both offer price and list price, suggesting that higher value can be expected for IPOs relating to high-valued peer group and vice versa. Valuations tend to be more accurate (adjusted R $^{2}$ = 77.5 %), when the price is estimated on the basis of comparable peer group P/E along with a set of financial information. The offer price and list price are found positively and significantly influenced by the financial information, i.e., book value, growth and risk along with peer group P/E.
Starting Page	27
Ending Page	46
Page Count	20
File Format	PDF
ISSN	03040941
Journal	DECISION
Volume Number	40
Issue Number	1-2
e-ISSN	21971722
Language	English
Publisher	Springer India
Publisher Date	2013-11-16
Publisher Institution	Indian Institute of Management Calcutta
Publisher Place	India
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Comparable firm Growth P/E IPO Risk Book value Peer group Management/Business for Professionals
Content Type	Text
Resource Type	Article

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