IPOs and Entrepreneurial Firms

Currently reading the monograph “IPOs and Entrepreneurial Firms” by Giancarlo Giudici and Silvio Vismara in Foundations and Trends in Entrepreneurship. A great overview of the state of research on the IPO considerations for young firms, based on intangible rather than physical assets.

Full of takeaways for us at Amundsen Investment Management, such as the following: “Vismara et al. (2015) compare the selection of peer firms made by investment banks as underwriters at the IPO with that done shortly thereafter as analysts. They find that several times there is a change in the composition of the group. The peers published in the IPO prospectuses have higher valuations than those published in the post-IPO equity research reports of the same firm, especially if the underwriter is US-based. The authors argue that underwriters select comparable firms that make IPO shares look conservatively priced, while this conflict of interest tends to fade afterward. The upward bias in peer selection is larger for underwriters with greater market power and lower for regular players in the IPO market.”

Careful about letting others choose your comparables!