Skip to main content

Initial public offering price support, valuation, and returns


This study examines the relationship between price support, valuation and returns in a unique sample of 114 firms going public at Borsa Istanbul. I utilize disclosed information in pre-issue prospectuses and valuation reports as well as post-issue material event files to document that: initial public offerings implementing price support have lower initial and short-term returns, and larger optimistic valuation bias relative to offerings without price support. Tests show that underwriters’ valuation bias increases the probability of implementing price support, and one standard deviation increase in price support is associated with a 19.4% decline in short-term returns, after controlling for the selection bias associated with simultaneously deciding the offer price and price support.

This is a preview of subscription content, access via your institution.


  1. Although implications of this hypothesis are consistent with the overvaluation and underwriter optimism argument, the exact valuation procedure in the US is confidential and valuation estimates are based on earnings multiples, whereas underwriters frequently use other multiples and valuation techniques, such as market-to-book multiple, dividend discount model and discounted cash flow (DCF) method. In my sample, peer multiples method carries 47% average weight, and DCF method carries 39% average weight on the fair value.

  2. Note that this argument does not hold for fixed price offerings as investors cannot negotiate the offering price.


  • Aggarwal, R. (2000). Stabilization activities by underwriters after initial public offerings. Journal of Finance,55(3), 1075–1103.

    Article  Google Scholar 

  • Alford, A. (1992). The effect of the set of comparable firms on the accuracy of the price-earnings valuation method. Journal of Accounting Research,30(1), 94–108.

    Article  Google Scholar 

  • Allen, F., & Faulhaber, G. R. (1989). Signaling by underpricing in the IPO market. Journal of Financial Economics,23(2), 303–324.

    Article  Google Scholar 

  • Benveniste, L. M., & Spindt, P. A. (1989). How investment bankers determine price and allocation of initial public offerings. Journal of Financial Economics,24(2), 343–361.

    Article  Google Scholar 

  • Benveniste, L. M., Busaba, W. Y., & Wilhelm, W. J. (1996). Price stabilization as a bonding mechanism in new equity issues. Journal of Financial Economics,42(2), 223–255.

    Article  Google Scholar 

  • Bonaventura, M., & Giudici, G. (2017). IPO valuation and profitability expectations: evidence from the Italian exchange. Eurasian Business Review,7(2), 247–266.

    Article  Google Scholar 

  • Boreiko, D., & Lombardo, S. (2011). Stabilisation activity in Italian IPOs. European Business Organization Law Review,12(3), 437–467.

    Article  Google Scholar 

  • Chen, Z., & Wilhelm, W. J. (2008). A theory of the transition to secondary market trading of IPOs. Journal of Financial Economics,90(3), 219–236.

    Article  Google Scholar 

  • Chowdhry, B., & Nanda, V. (1996). Stabilization, Syndication and Pricing of IPOs. Journal of Financial and Quantitative Analysis,31(1), 25–42.

    Article  Google Scholar 

  • Directive 128.VII.1 of the Capital Markets Board of 22 June 2013 on the Equity Issue, Retrieved from

  • Ellis, K., Michaely, R., & O’Hara, M. (2000). When the underwriter is the market maker: an examination of trading in the IPO aftermarket. Journal of Finance,55(3), 1039–1074.

    Article  Google Scholar 

  • Fjesme, S. L. (2016). Initial public offering allocations, price support, and secondary investors. Journal of Financial and Quantitative Analysis,51(5), 1663–1688.

    Article  Google Scholar 

  • Fjesme, S. L. (2018). When do investment bankers use IPO price support? European Financial Management, forthcoming.

  • Francis, J., Olsson, P., & Oswald, D. R. (2000). Comparing the accuracy and explainability of dividend, free cash flow and abnormal earnings equity value estimates. Journal of Accounting Research,38(1), 45–70.

    Article  Google Scholar 

  • Gomez-Mejia, L. R., Haynes, K. T., Nunez-Nickel, M., Jacobson, K. J. L., & Moyano-Fuentes, H. (2007). Socioemotional wealth and business risk in family-controlled firms: Evidence from Spanish olive oil mills. Administrative Science Quarterly,52(1), 106–137.

    Article  Google Scholar 

  • Hanley, K. W., Kumar, A. A., & Seguin, P. J. (1993). Price stabilization in the market for new issues. Journal of Financial Economics,34(2), 177–197.

    Article  Google Scholar 

  • Hao, Q. (2007). Laddering in initial public offerings. Journal of Financial Economics,85(1), 102–122.

    Article  Google Scholar 

  • Hundtofte, C. S. & Torstila, S. (2018). Evidence of anchoring to industry multiples in IPO pricing, Working paper.

  • Lewellen, K. (2006). Risk, reputation and price support. Journal of Finance,61(2), 613–653.

    Article  Google Scholar 

  • MacKinlay, A. C. (1997). Event studies in economics and finance. Journal of Economic Literature,35(1), 13–39.

    Google Scholar 

  • Miller, E. M. (1977). Risk, uncertainty, and divergence of opinion. Journal of Finance,32(4), 151–1168.

    Article  Google Scholar 

  • Paleari, S., Signori, A., & Vismara, S. (2014). How do underwriters select peers when valuing IPOs? Financial Management,43(4), 731–755.

    Article  Google Scholar 

  • Roosenboom, P. (2012). Valuing and pricing of IPOs. Journal of Banking and Finance,36(6), 1653–1664.

    Article  Google Scholar 

  • Wilhelm, W. J. (1999). Secondary market stabilization of IPOs. Journal of Applied Corporate Finance,12(1), 78–85.

    Article  Google Scholar 

Download references



Author information

Authors and Affiliations


Corresponding author

Correspondence to Lokman Tutuncu.

Ethics declarations

Conflict of interest

The author declares that he has no conflict of interest.

Appendix: List of variables

Appendix: List of variables

Variables Definition Source
Age IPO year minus incorporation year. Prospectus
Family Dummy variable, equal to 1 if family owned at the time of IPO, 0 otherwise. Two or more members of a family must hold at least 50% of ordinary shares and at least 1 member of family must sit on board to qualify as family firm. Prospectus
Lockup Number of days from first trading date to the first date insiders are allowed to sell their shares. Prospectus
Participation ratio Percentage shares sold by existing shareholders at IPO. Prospectus and post-issue reports
Capital increase ratio Percentage new shares issued relative to pre-issue equity. Prospectus and post-issue reports
Public ratio Percentage shares public following completion of IPO. Prospectus and post-issue reports
Support ratio Percentage IPO proceeds used to support share price in the aftermarket, calculated as amount spent on stabilizing bids divided by total proceeds. Post-issue reports
PriceSupport Dummy variable equal to 1 if underwriter places stabilizing bids in the aftermarket, 0 otherwise. Post-issue reports
Bias Percentage deviation of the underwriters’ estimated fair value from the first day market capitalization. Bias is calculated as fair value minus first day value, divided by first day value. Fair value for bookbuilding offerings is midpoint of the offer price range. Valuation reports, own calculation
Optimism Dummy variable representing optimistic valuation bias, equal to 1 if underwriter overprices the issue, 0 otherwise. Valuation reports, own calculation
DD Percentage deliberate discount offered by underwriters over estimated fair value, and midpoint discount for price range offerings calculated relative to realized offer price. Valuation reports, prospectus
Underpricing Percentage initial return calculated as first day closing price divided by offer price, minus 1. BIST Data Store, own calculation
InvMills Inverse Mills ratio is computed from the Probit1 regression using Eq. 1, to control selection bias related to valuation error. Probit
Size Natural logarithm of the first day market capitalization. Own calculation
Bookbuilding Dummy variable equal to 1 if offering is a price range offering, 0 otherwise. Prospectus

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Tutuncu, L. Initial public offering price support, valuation, and returns. Eurasian Econ Rev 10, 267–282 (2020).

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI:


  • Initial public offering
  • Price support
  • Price stabilization
  • Valuation
  • Returns