Economics Research

Investigating the Accuracy of Relative Valuation Models, P/E and P/B in Prediction of Initial Public Offering Price in Tehran Stock Exchange: 2001-2006

Document Type : Research Paper

Authors

MirFeiz Fallah Shams 1
Mahdi Rashno 2

1 Ph.D. in Financial Management, Assistant Professor, University of Tehran

2 M.S. in Finantial Management, Imam Sadiq University

Abstract
The main objective of this paper is to study the accuracy of the relative valuation
models, P/E and P/B. We chose 75 companies which are listed in Tehran Stock
Exchange from 2001 until 2006. The accuracy of relative valuation models in
prediction of initial public offering price depends on selection of comparable firms. In
this paper, comparable firms were selected on the basis of industry type, return on
equity (ROE), and total assets. In case of comparable firm selection, our findings
prove that companies with the same ROE is more accurate than those in the same
industry. The accuracy prediction in the companies with same total assets is in the
last place in prediction accuracy. In general conclusion, the P/B ratio is more
accurate than the P/B ratio.

Keywords

Relative Valuation Models
Prediction Accuracy
P/E Ratio
P/B Ratio

  • Receive Date 17 November 2009
  • Revise Date 15 July 2010
  • Accept Date 20 October 2010

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