IPO valuation in an emerging market – a study in Iran

Purpose: This study aims to highlight the accuracy, performance and selection of the IPO valuation methods
in the Islamic Republic of Iran's emerging market.

Design/methodology/approach: We performed accurate ex-ante evaluations based on a pre-IPO dataset obtained from valuation institutions. We considered valuation methods through correlations, Mann-Whitney U tests and regression analysis, using a sample of 83 IPOs from January 2017 to March 2021.

Findings: We found that the Dividend Discount Model (DDM) was the most popular in Iran. Even after controlling firm characteristics and market circumstances, the IPO price was highly correlated to pre-IPO reports' estimates. The results showed that firms' age, size and profitability affected the selection of valuation methods. The valuers did not apply forward P/E in a volatile market. Firm size affected the weights assigned to Free Cash Flow to the Firm (FCFF), and the valuers considered the Asset-in-Place (AIP) intensity to determine the weights of DDM, P/E and Net Asset Value (NAV), and they mainly employed the P/E to value old firms. Finally, this study estimated the accuracy of the pre-IPO report at 61% and found the highest accuracy to be associated with DDM.

Originality/Value: IPO pricing in emerging markets constitutes a more significant dilemma than in developed markets. This paper provides empirical evidence of IPO pricing focusing on valuation methods used in the context of an emerging market – the Islamic Republic of Iran.