There are significant limits to arbitrage in the pricing process before a firm goes public. (i.e. what

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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.

Posted Date: Sep 29, 2021 07:32 AM

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There are significant limits to arbitrage in the pricing process before a firm goes public. (i.e. what

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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 the full answer

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