Post IPO valuation of high tech firms in the United States.

Post IPO valuation of high tech firms in the United States.
Proposal Statement

April 2015
Table of Contents
1.0 Introduction. 3
2.0 Justification of Study. 3
3.0 Objectives of the study. 4
4.0 Scope of study. 4
6.0 References. 6

1.0 Introduction
The research will focus on the post Initial Public Offer (IPO) valuation of high tech firms in United States. It seeks to find out if the prices and the valuations of the high tech firms in United States before the IPO change after the IPO is launched. It will focus on the following: First the valuation of the high tech firms before the IPO is calculated and the valuation is compared to the valuation of the high tech firms once the IPO is launched, Secondly the price pre IPO is compared with the price of the shares of the high tech firm post IPO. The research based on the findings of the changes in prices and valuation post IPO will try to come up with various factors that cause the price and the valuation to either move up or down.
2.0 Justification of Study
The post IPO valuation of high tech firms is very crucial in the understanding the operations of any financial market and mostly in the stock markets. This is due to the dominance of the high tech firms in the stock markets. Post IPO valuation of the tech firms is complicated by the fact that the high tech IT firms especially the new firms are many years away from having a sustained revenue base and the new IT firm would have huge costs.
According to (Chan, Lakonishok and Sougiannis, 2001) the technology sector and the pharmacy sector accounted for about 40% of the value of the S&P Index by the end of 2009.The high tech firms are very complex as the companies invest a lot of money in research and development now in the hope of reaping benefits from the new technologies that the come up with in the future. There is a need to understand the valuation of the high tech IT firms as the form a huge portion of the various stock exchanges they are traded in and to add to this there is limited research into the post IPO valuation of the high tech IT firms and thus necessitating this research.
One of the major causes of the variations between the pre IPO share prices and post IPO share prices in the common move by companies to deliberately underprice their IPO prices. (Aggarwal, 2003) argues that this irrational behavior is due to speculative in the market and (Rajan and Servaes, 1997) argue that firms deliberately underprice their shares due to the over optimism presented by the naïve investors in the market. On the other hand some firms deliberately using the signaling theory underprice the IPO price knowing well they will for sure generate more cash in the next round of IPO offers (Grinblatt and Hwang ,1989),
3.0 Objectives of the study
This research seeks to achieve the following key objectives:
1. Calculate the post IPO valuation of various high tech IPO firms and compare the post IPO valuation with pre IPO valuation.
2. Compare the post IPO prices of various high tech IPO firms and compare this with pre IPO share prices.
3. Determine the factors that lead to the variations between the pre IPO prices and valuation and the post IPO prices and valuations.
4.0 Scope of study
The research will be conducted in the United States and the NASDAQ stock market will be used to select the high tech IT firms and this is due to the fact that NASDAQ has the highest concentration of the high technology IT firms. The research will consider 5-10 firms that have had IPO’S over the last ten years and look at the prices pre and post valuation.

5.0 Methodology
The research will use various approaches for the valuation of the firms and the share prices. It will use the traditional valuation methods of asset based valuation methods and the discounted cash flow approach. Once the value and the share prices of the firm has been obtained using the above methods various hypothesis will be formulated and then multiple regression analysis conducted to see if the various hypothesis are accepted or rejected. The multiple regression analysis will also be used to conduct tests for the various factors that cause the valuation and share prices to move up or down.

6.0 References

Aggarwal, Reena, 2003, Allocation of initial public offerings and flipping activity, Journal of
Financial Economics 68, 111–135.
Chan, Louis K. C., Josef Lakonishok and Theodore Sougiannis, 2001, The stock market
Valuation of research and development expenditures, Journal of Finance 56, 2431-2456.
Grinblatt, Mark, and Chuan Yang Hwang, 1989, Signaling and the pricing of unseasoned new
Issues, Journal of Finance 44, 393–420.
Rajan, R., and H. Servaes, 2003, “The effect of market conditions on initial public offers, “in J. McCahery and L. Renneboog, eds., Venture Capital Contracting and the Valuation of High-tech Firms, Oxford University Press.