Silvio Vismara

Over‐optimism when pricing IPOs

Purpose - The purpose of this paper is to contribute to the literature on the valuation of initial public offerings (IPOs). In particular, it tests the presence of over-optimism when pricing IPOs on the Italian Nuovo Mercato. Design/methodology/approach - The paper investigates whether the analysts make systematic errors when forecasting the performance of the firm undergoing the IPO by comparing analysts’ ex-ante expectations to actual ex-post figures. Using a sample of pre-IPO analysts’ reports, the paper performs a regression analysis using the forecast errors (FE) of post-issue sales as dependent variable in order to find out the determinants of mis-valuation. Findings - It is found that the Nuovo Mercato has been essentially a “market for projects” in which young enterprises endowed with a few tangible assets sold their business plans to the market exploiting high-growth opportunities. In the aftermarket, stock and operating performances are found to be declining, falling short of initial expectations. The extent of the actual post-issue growth was lower than the ex-ante estimations by financial analysts, whose valuations were systematically upwardly biased. Affiliated analysts are found not to be more over-optimistic than the unaffiliated. FE appear to be primarily driven by the extent of forecasted growth, by market sentiment and (inversely) by the size of the firm. Originality/value - From the perspective of investors, this study contributes to the understanding of the helpfulness and limits of the analysts’ forecasts in investment decisions and, more generally, of the determinants of over-optimism. This study addresses the issue of over-optimism and provides empirical evidence of it. This paper also contributes to the literature on the rise and fall of the new European stock markets.