Private firm pricing and propensity to go public: evidence from mutual funds holdings

Private firm pricing and propensity to go public: evidence from mutual funds holdings PurposeThe purpose of this study is to focus on mutual funds’ valuations of their US private firm holdings. According to extant academic literature, mutual funds’ boards of directors should assign prices to their private firm stocks based on their own determination of fair value.Design/methodology/approachThis study investigates fluctuations in valuations of mutual funds holdings of private firms, and whether or not mutual funds managers are able to pick privately held firms that eventually undergo an initial public offer.FindingsThe study shows that private firm common stocks’ prices fluctuate much more than preferred stocks’; however, as expected, preferred stock is the most selected security type. This study also investigates these firms’ propensity to undergo an initial public offering (IPO). Results show that mutual funds allocated most of their capital to US private sector firms that underwent an initial public offering. Logit model results reveal that fund managers are able to pick privately held firms that will go public.Research limitations/implicationsDue to data limitations, the authors’ analysis does not control for venture capital ownership; an issue the authors plan to address in the future.Originality/valueThough, research in this area may exist, the authors have not found academic literature related to holdings of private firms by mutual funds, pricing by funds’ boards of directors or the motives for such investments. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Private firm pricing and propensity to go public: evidence from mutual funds holdings

The Journal of Risk Finance, Volume 17 (3): 19 – May 16, 2016

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1526-5943
DOI
10.1108/JRF-09-2015-0088
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this study is to focus on mutual funds’ valuations of their US private firm holdings. According to extant academic literature, mutual funds’ boards of directors should assign prices to their private firm stocks based on their own determination of fair value.Design/methodology/approachThis study investigates fluctuations in valuations of mutual funds holdings of private firms, and whether or not mutual funds managers are able to pick privately held firms that eventually undergo an initial public offer.FindingsThe study shows that private firm common stocks’ prices fluctuate much more than preferred stocks’; however, as expected, preferred stock is the most selected security type. This study also investigates these firms’ propensity to undergo an initial public offering (IPO). Results show that mutual funds allocated most of their capital to US private sector firms that underwent an initial public offering. Logit model results reveal that fund managers are able to pick privately held firms that will go public.Research limitations/implicationsDue to data limitations, the authors’ analysis does not control for venture capital ownership; an issue the authors plan to address in the future.Originality/valueThough, research in this area may exist, the authors have not found academic literature related to holdings of private firms by mutual funds, pricing by funds’ boards of directors or the motives for such investments.

Journal

The Journal of Risk FinanceEmerald Publishing

Published: May 16, 2016

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