The Use of Comparable Firm Approach in Valuing Australian IPOs
Coauthor(s): Janice How, Jennifer Lam.
Despite the difficulty of finding comparable firms in a less populated market, we provide evidence on the usefulness of the comparable firm approach using 275 Australian industrial IPOs from 1993 to 2000. We show that, without adjustments, IPO price-earnings (P/E) and market-to-book (P/B) multiples based on management forecasts of earnings and book values of equities provided in prospectuses are strongly associated with the average P/E and P/B multiples of two comparable firms (matched on industry, growth and size). Additional tests show that the value estimated using the comparable firm approach (in the form of a P/V ratio, where P is the offer price and V is the estimated firm value) is associated with IPO underpricing.
Source: International Review of Financial Analysis
How, Janice, Jennifer Lam, and Julian Yeo. "The Use of Comparable Firm Approach in Valuing Australian IPOs." International Review of Financial Analysis 16, no. 2 (2007): 99-115.