Proceedings of The 9th International Conference on New Ideas in Management, Economics and Accounting
Year: 2021
DOI: https://www.doi.org/10.33422/9th.imeaconf.2021.10.02
How Weights Assigned to Each Valuation Method Impact IPOs Valuation Performance?
Douaa Tizniti and Mohammed Rachid Aasri
ABSTRACT:
We investigate the impact of weights assigned to each valuation method on initial public offerings’ valuation performance. Review of existing literature reveals that such valuation performance lacks examination in terms of weights assigned as most studies focus on the valuation method used per se. Accordingly, we compare between individual value estimate and fair value estimate to examine initial public offerings’ valuation performance before and after assigning weights. Whereby, underwriters assign a weight between 0% and 100% to individual value estimate produced by each valuation method used in order to reach one fair value estimate. We assess initial public offerings’ valuation performance through bias and accuracy valuation errors as well as valuation explainability. Our sample consists of 110 observations associated to initial public offerings conducted on the Moroccan stock exchange between 2004 and 2018. Results reveal that weights assigned to individual value estimate when setting the fair value estimate enhance initial public offerings’ valuation performance. Specifically, valuation errors decrease while valuation explainability increases. In fact, both optimistic and pessimistic fair value estimate are closer to market price in comparison with individual value estimate. A closer analysis reveals that weights partially absorb valuation optimism and pessimism. Consequently, these weights reduce the extent of both underpricing and overpricing of initial public offerings. We conclude that combining different valuation methods enhance initial public offerings’ valuation performance. Additionally, underwriters play an important role when valuing initial public offerings by assigning specific weights to each valuation method that differ from one initial public offering to another.
keywords: optimism; overpricing; pessimism; underpricing; underwriters.