Pricing performance of IPOs in India

Abstract

IPO market in India has had its share of ups and downs over a period, for more than the last decade. It has seen a steep rise in the initial years of the post liberalization of Indian Economy. The growth observed during the first half of the 90s is mostly attributed to the financial liberalization of the economy. An Initial Public Offering (IPO) is the first sale of corporation?s common shares to investors on a public stock exchange. The main purpose of an IPO is to raise capital for the corporation. This study investigates 251 IPOs for measuring listing performance and 225 IPOs for measuring medium and long term performance, which raised capital, have been listed on NSE between Nov. 1994 and April 2006. Underpricing of an IPO has been measured as the return on the first day of trading while Underperformance means negative returns accrued to the investors holding these IPOs in the long run. The finding of study reveals an average initial returns or underpricing of 40.08 Per cent and if underpricing is adjusted to market return (using Nifty) for same period, the returns decline to 39.36 Per cent. To get possible explanation for short run, medium and long run underpricing for IPOs, factors like Offer Price, Offer Date, Offer Size, Listing Date, Age, Industry, Lead manager and Oversubscription of IPOs are considered. The empirical results suggests that factors including oversubscription, inverse of IPO price, year dummy for 2001, activity based industry dummy for software and Lead Manager have significant impact on underpricing. While the first four are positively related, the last variable is negatively related with underpricing. As far as medium and long run performance is considered Age, Listing Delay, Reciprocal of IPO price, Lead Manager, Oversubscription, Dummy in year 2005, Financial service Industry have been found singnificant either at the end of first, second or third year.