What Directors Can Learn From IPOs

After a lull during the financial crisis that started in 2008, initial public offerings (IPOs) have made a resurgence. While the pandemic slowed down most economic and financial activity, 2020 was the best year for IPOs in over a decade: 165 IPOs raised $61.9 billion in the U.S. Remarkably, we find about two-thirds of these IPOs have negative earnings (losses) in the last 12 months prior to the IPO, yet many of these IPOs are valued at more than a half billion dollars by investors.

Valuation of IPOs occupies an important place in finance and corporate governance, because an IPO provides public capital market participants their first opportunity to value a set of corporate assets. Valuation of IPOs is also quite relevant from an economic efficiency perspective: the IPO is the first opportunity that directors and managers of such (usually young) companies get to observe price signals from the public capital markets. Such signals can either affirm or repudiate directors’ and management’s beliefs regarding the firm’s future growth opportunities, which have obvious implications for real economic activity — for example, employment and corporate investment.

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