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

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.