Question: There are significant limits to arbitrage in the pricing process before a firm goes public. (i.e. what should be the initial price?) Suppose that during

There are significant limits to arbitrage in the pricing process before a firm goes public. (i.e. what should be the initial price?) Suppose that during this pricing process, the people involved, otherwise rational, anchor on industry multiples. Further suppose that people anchor on earnings multiples (e.g. the average firm in industry Z has a valuation of 17x earnings). Based on this behavioral bias of anchoring, speculate on how future returns for these newly public firms will relate to a characteristic that equals the difference between a firm’s P/E ratio – based on an IPO price - and the associated industry P/E ratio. Explain your reasoning.

Step by Step Solution

★★★★★

3.45 Rating (155 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Limits to arbitrage may be a theory in financial economics that thanks to restrictions that are placed on funds that might ordinarily be employed by r... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!

For the park discussed above, what should be the initial park population in the case where the populations decline by 11% every year?

(a) What should be the initial price of the bond? Take the present value of $1,000 to be received after 15 years at 10 percent, using Appendix B at the back of the text. (b) If immediately upon...

What is an anchoring bias and how does it affect the process of setting new standards at the end of an accounting period?

Data set: Skinfold7 Celiac disease results in an inability to absorb carbohydrates and fats. Crohns disease is another chronic intestinal disease in which the bodys immune system attacks the...

There are 4 models of Corporate Social Responsibility. I. Economic Model a. Profit-Based SocialResponsibility aka Economic Model : Milton Friedman's 1970New York Times article "The Social...

The wheat harvesting season in the American Midwest is short, and most farmers deliver their truckloads of wheat to a giant central storage bin within a two-week span. Because of this, wheat-filled...

Multiple Choice Questions: 1. Monopoly is unlike perfect competition in that a. A monopolists price is greater than marginal cost. b. There are no barriers to entry into a monopoly industry. c. A...

Many textbooks now come with an online component for self-assessment, study, and quizzes. Teachers are experimenting with the new software components, and wondering whether they have any effect on...

There is some evidence that high school students justify cheating in class on the basis of poor teacher skills or low levels of teacher caring (Murdock, Miller, & Kohlhardt, 2004). Students appear to...

Harrington Explorations Inc. is interested in expanding its copper mining operations in Indonesia. The area has long been noted for its rich deposits of copper ore. With copper prices at near-record...

Describe the risks and opportunities that might arise if the group decided to use the market risk models it uses for its own management purposes to provide its asset management clients with portfolio...

Inventory Land Book Value Fair Value $ 630,000 $ 600,000 750,000 990,000 1,700,000 2,000,000 Buildings Customer relationships Accounts payable 0 (80,000) Common stock (2,000,000) Additional paid-in...

The standard Treasury Bond futures contract has a face value of $100,000, at least 15 years to maturity and a coupon of 6%, payable semi-annually. The quoted price of the futures contract is based on...

15. What option allows the scheduler to go in and look at the information "behind" the scheduled appointments? For example, date "appointment made", wait times, service connection, etc).

These items are taken from the financial statements of Longhorn Co. at December 31, 2022. Buildings $105,800 Accounts receivable 12,600 Prepaid insurance 3,200 Cash 11.840 Equipment 82,400 Land...

For the co-planar force system shown below, determine by calculation, the resultant force in magnitude and direction. Give your answers to 2 decimal places. 230N 60N* 130 120N 70 RE 60N

On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2022, at which time possession of the leased asset will revert back to...

What are the two components of a company's income tax provision? What does each component represent about a company's income tax provision?

Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from...

For 2010, Sampsell Inc. computed its annual postretirement expense as $240,900. Sampsells contribution to the plan during 2010 was $180,000. Prepare Sampsells 2010 entry to record postretirement...

In what section of the balance sheet should the following items appear, and what balance sheet terminology would you use? (a) Treasury stock (recorded at cost). (b) Checking account at bank. (c) Land...

=+a. Describe, in words, the event A and B.

=+b. Describe, in words, the event A or B.

=+c. None of the plants is completed by the contract date.