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It is a common practice for investment banks competing for the lead underwriting role in an IPO to provide estimates of firm value as part of a "beauty contest " presentation. A beauty contest, in which fifteen investment banks of varying reputation provided written proposals that included value estimates, provides an opportunity to observe any differences in valuation methodology relative to investment bank reputation. I expect to see, based on research by Hanley (1993) and Bradley and Jordan (2002), that the value ranges submitted vary in relation to investment bank reputation. The previous research finds that low prestige investment banks make fewer adjustments to the pricing range during the IPO (initial public offering) process than do high prestige firms. I find that high-reputation investment banks usefewer valuation methods and provide less support of their valuations in the written presentation, yet they provide narrower valuation ranges than do lower-reputation investment banks. The investment banks with lower reputation appear to be signaling both commitment and quality through more rigorous valuation however their value estimates are less precise. Further, I find that the most common methods used are the relative value method (multiple of earnings) and discounted cash flow.
*Prior to an initial public offering (IPO) of stock, a company considering raising equity (an "issuer") often holds a competition among investment banks, generally referred to by practitioners as a "beauty contest," as part of the selection of a lead underwriter. During the beauty contest, each potential lead underwriter makes a presentation that includes an estimate of the value of the issuer's equity and the price at which shares might be offered. These early, non-public price discussions are the beginning of the IPO price formation process; however, they may also serve other purposes. The role of lead underwriter in an IPO is highly sought after by investment banks due to both the higher level of compensation earned in the role as well as the impact on reputation associated with the role. As a result, investment banks will use the beauty contest presentations to demonstrate valuation competence and unique market knowledge to the issuer in an effort to set themselves apart from the other competing investment banks. They will also use the price discussion to signal confidence in...