Valuing initial public offerings (IPOs) using multiples allows underwriters discretion when selecting comparable firms. We find that they systematically exclude candidate comparable firms that make a given IPO appear overvalued. On average, comparable firms published in official prospectuses have 13%-38% higher valuation multiples than those obtained from matching algorithms or selected by sell-side analysts, including the same underwriter's analyst after the IPO. Even if IPOs are priced at a discount as compared to peers selected by the underwriters, they are still at a premium with regard to alternatively selected peers. Greater bias in the underwriter's selection of peers leads to poorer long run performance.
- Initial Public Offerings, valuation, underwriters, comparables, multiples