Stock price = Company value / Amount of stocks
Who determines company value at IPO? As I understand It is determined by the owner? Or external experts?


1 Answer 1


Who determines company value at IPO?

The Owners based on the advice from Lead Bankers and other Independent auditors who would determine the value of the company at the time of listing. At times instead of determining a fixed price a range is given [lower side and higher side]. The Market participants [FI / Institutional Investor Segments] then decide the price by bidding at an amount.

There are multiple aspects in play that help stabalize the IPO and roles of various parties. A quick read of question with IPO tag is recommended

Generally at a very broad level, one of the key purpose of the IPO is to either encash Owner equity [Owner wants some profits immediately] or Raise additional Capital. More often it is a mix of both.
If the price is too low, one loose out on getting the true value, this would go to someone else. If the price is too high, then it may not attract enough buyers or even there are buyers, there is substantial -ve sentiment. This is not good for the company. Read the question From Facebook's perspective, was the fall in price after IPO actually an indication that it went well?

This puts determining the price of IPO more in the realm of art than science. There are various mechanism [Lead bankers, Institutional Investors, Underwriters] the a company would put in place to ensure the IPO is success and that itself would moderate the price to realistic level. More often the price is kept slightly lower to create a positive buzz about the stock.

  • So, could the owners set any price? Commented Dec 8, 2016 at 16:22
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    @VladislavKrot The key point is - if the price is set too high, it won't be fully invested. This means that the company may not have the cash it needed in the first place [most IPO's are done for basically one of 2 reasons: (1) to pay for a specific company growth plan; or (2) so the current owner can sell part or all of the business]; ie: if you need $1M, and you set your IPO price at $100, you need to sell 10,000 shares to reach that $1M. On the other hand, if you set the price too low, you may lose out on money that you might have otherwise gotten. Commented Dec 8, 2016 at 16:44
  • @VladislavKrot Typically, no. If the company is huge and powerful and can execute the entire IPO by themselves, they can theoretically set the price anywhere they want, though if it's too high they won't sell any shares. (This might even make sense if they intend to lower it over time to try to get the highest possible price.) But in a typical case, the owners need participation of investment banks, institutional investors, an underwriter, and so on or there's no IPO at all, and those entities won't participate if the price is unreasonable. Commented Dec 8, 2016 at 19:53

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