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

Abstract

Purpose

The 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/approach

This 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.

Findings

The 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/implications

Due to data limitations, the authors’ analysis does not control for venture capital ownership; an issue the authors plan to address in the future.

Originality/value

Though, 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.

Citation

Alverio, M. and Rodríguez, J. (2016), "Private firm pricing and propensity to go public: evidence from mutual funds holdings", Journal of Risk Finance, Vol. 17 No. 3, pp. 328-346. https://doi.org/10.1108/JRF-09-2015-0088