Pre-IPO information and IPO valuation accuracy: the moderating role of book-building

The main objectives of this thesis are to investigate the valuation accuracy of initial public offerings (IPOs) using multiple methods (price-to-earnings, price-to-book, and price-to-sales) and the determinants of IPO valuation in Malaysia. The emphasis on IPO valuation accuracy is motivated by the lack of information on firms’ valuation after the regulation on price-to-earnings was abolished in 1996. This study examines 458 IPOs listed throughout 2000-2017 and found that that the price-to-sales method provides the most accurate valuation of firms, specifically for firms with high growth rates, high or low debts, and/or inconsistent earnings in consecutive years. Price-to-sales is then applied to the IPO valuation ratio measurement, which is estimated using multiple regression model based on pre-IPO information in prospectuses, namely disclosure regulation of earnings forecasts, underwriter reputation, institutional investor’s ownership, growth opportunity, retail investor’s ownership, and pricing mechanism. This study finds that the regulatory change in earnings forecasts disclosure from mandatory to voluntary and greater allocation to retail investors have negative impacts on IPO valuation. Meanwhile, higher allocations of shares to institutional investors and the book-building mechanism lead to positive impacts on IPO valuation. This study also analyses the moderating effect of pricing mechanism on the determinants of IPO valuation, and finds that book-built IPOs certified by prestigious underwriters are highly valued. The findings of this study suggest that underwriters should employ at least the price-to-sales method as it could reduce mis-valuation of IPOs. Managers should be aware of the findings to ensure that they recognise the importance of disclosing these indicators in prospectuses to boost their firms’ values. Regulators, such as the Securities Commission, could enhance the current regulation by re-imposing the disclosure requirement regarding earnings forecasts and incorporating new listing rules for the book-building mechanism.