Price performance of IPOs in India: An Empirical Analysis

Abstract

The present study provides an overview of the Capital market introduces the primary market, outlines the price performance of IPOs. It also discusses the price mechanism; allocation of IPOs and factors affecting price determination and price performance of IPOs. For the study, the research population included the IPOs with book building price mechanism listed on National Stock Exchange (NSE) for the period 2005-2012. The number of IPOs undertaken for the study is 300. Although, there is rich literature on performance of Indian IPOs, but there are fewer studies covering the macroeconomic conditions influencing performance of IPOs. Since the macroeconomic environment influences the company’s decision regarding new issue. The duration of the current research is from January 2005 to December 2012. This timeframe is selected for the current research, as it includes two important time periods of Indian economy, i.e., pre-recession (2005-2008) and post-recession (2009- 2012). The study has analysed the performance of new issues in the short run and long run in India. The comparison of the listing day returns has been done for the pre-recession and post-recession period. The long run performance of the IPOs during the two time horizons has been compared through z-test. There is a significant difference in short- run returns before and after the recession period. To compare the performance of new offerings across the sectors, ANOVA was applied which indicates that there is no significant difference in the performance of new issues in different sectors. There is little evidence of research covering the role of information in underpricing of IPOs. The present study has taken the initiative to design a model depicting relation of information and underpricing. The results of the present study indicate that size of the firm and the issue size influence the extent of underpricing. The results also suggest that age of the firm has an impact on the listing day returns. Grading of IPO also influences underpricing. Reputation of the underwriters also affected the first day performance of offerings. Further the timings of the offer also influence the first day returns. However, the sale of promoters’ stake during the issue doesn’t influence the first day returns. The research has been extended to optimize the first day returns and it has been found that the optimal returns are provided when there is boom in the market. vi A Structural model has been designed to analyse the factors influencing first day returns. The results depict that size of the firm; issue size; age of the firm; IPO grading; underwriters’ reputation/rank and timing of the offer have a significant impact on the listing day returns. It has also been found that the measurement model fit all the indices and the model is a good fit. The results indicate that age of the firm, issue size, size of the company, underwriter’s reputation and IPO grading are positively associated with the first day returns whereas the timing of the offering is negatively associated with the extent of underpricing.