The Accuracy of Price-Earnings Ratio and Discounted Cash Flow Methods in Predicting the Offer Price of IPO Stocks


ER B.

International Research Journal of Finance and Economics, no.97, pp.23-33, 2013 (Peer-Reviewed Journal)

Abstract

In this study accuracy of price-earnings and discounted cash flows methods which are most frequently used methods in stock valuation has been researched for the firms doing initial public offering in 1993-2010 period in Turkey. When they determine initial public offering price, 160 out of total 210 firms which did initial public offering in the research period (investment trusts and mutual funds are excluded) have used price-earnings ratio while 119 of them have used discounted cash flows. In the research, by comparing the prices obtained by using pricing methods and final initial public offering prices forecast errors over these two methods have been calculated. Accordingly, in the firms using price-earnings method on average 35% and in the firms using discounted cash flows method on average 18% error values have been determined. In the cross-sectional regression analysis conducted however, it has been determined that prices obtained with respect to pricing methods have high explanatory power on final initial public offering prices.