Determinants of oversubscription of SME IPOs in India: evidence from quantile regression

Abstract

PurposeThe study aims to measure the subscription level and examine the determinants of oversubscription of small and medium enterprise (SME) initial public offerings (IPOs) in India.Design/methodology/approachThe study employs cross sectional data to analyze 403 SME IPOs issued from Feb 2012 to May 2018 and listed on Bombay Stock Exchange's small and medium enterprise (BSE SME) platform and National Stock Exchange (NSE) EMERGE to investigate the determinants of oversubscription of SME IPOs. Hence, the study makes use of ordinary least square regression and quantile regression to test the hypotheses formulated for the determinants of oversubscription.FindingsThe main findings unveil that while issue price, pricing mechanism, listing delay negatively influence oversubscription; firm size, underwriter reputation, hot market and underpricing have been divulged to positively influence oversubscription. However, issue size emerged out to be significant in quantile regression at 25th, 50th and 75th quantiles.Research limitations/implicationsThe present study is confined to limited number of variables in understanding the factors impacting oversubscription. Future studies could include macroeconomic variables like gross domestic product (GDP), inflation rate, industry specific variable, i.e. technology/nontechnology industry, financial/nonfinancial industry for better understanding. Cross country analysis is suggested in future studies to validate the findings of current study. Future studies are advised to conduct the study examining the factors affecting oversubscription in light of COVID-19 pandemic.Practical implicationsThe findings of the present study offer implications to academicians, investors, investment advisors and regulators. It provides useful insights to researchers by listing the factors that contribute to variation in subscription levels in emerging economy like India thereby, paving the way for future researches in SME IPOs in countries with different institutional settings. For investors, the study provides additional and novel information useful for IPO valuation and informed investment decisions. In addition, the findings put investment advisors in better place to guide potential investors regarding investment in good quality SME stocks (i.e. highly subscribed stocks) in more informative manner. Last but not the least, as this study would assist the regulators in handling future IPOs in a way that augments the chances of success of SME IPOs.Originality/valueThis study is a novel contribution in widening the IPO literature by examining the relationship between pre-IPO firm actions like issue price, pricing mechanism, issue size, firm size, listing delay, underwriter reputation, hot market, underpricing and oversubscription in unexplored settings of Indian SME IPOs.

Factors Affecting Oversubscription Share

“…According to signal theory, larger issue sizes send good quality signals to investors thereby increasing their demand. Meanwhile, a smaller issue size is a bad signal for risk-neutral investors and will lead to a lower probability of oversubscription (Arora and Singh, 2020b). This is supported by the results of several other studies conducted by (Albada et al, 2019), (Mehmood et al, 2020), (Tajuddin et al, 2015) which proves a negative relationship between supply size and oversubscription.…”

“…Larger company size encourages higher investor demand which results in a higher possibility of oversubscription events for a stock (Badru and Ahmad-Zaluki, 2018). Firms with a larger asset base have reduced information asymmetry and uncertainty related to future stock values (Arora and Singh, 2020b). Therefore, investors' bids for bids tend to be higher for firms with larger asset bases compared to firms with smaller asset bases.…”

Determinants of Ipo Oversubscription on Islamic Stocks: Evidence From Indonesia

“…This study uses a quantitative approach to establish relationships between independent variables viz., issue price, issue size, firm size, listing delay, and underpricing, and IPO oversubscription. Based on the works of Arora & Singh (2020) and Low & Yong (2011) The dependent variable used in this study is the oversubscription ratio. This ratio shows how many times an issue is subscribed to by the investors.…”

“…In the literature, factors that cause the oversubscription in the IPOs have received substantial attention (Avci, 2021;Dong et al, 2021;Gupta, Singh, & Yadav, 2022;Hoque & Mu, 2021;Payne, Trudell, Moore, Petrenko, & Hayes, 2022). These include investor demand (Arora & Singh, 2020;Mensi, Lee, Vinh Vo, & Yoon, 2021); promotional activities (Arora & Singh, 2020;Lan & Khoi Thach, 2022); previous number of IPO's conducted in the country (Lan & Khoi Thach, 2022;Mehmood, Mohd-Rashid, Ong, & Abbas, 2021); prior information about the company making the IPO (Chowdhry & Sherman, 1996;Hayat & Hassan, 2017), level of market efficiency (Avci, 2021;Karnatak, Malik, & Udayan Karnatak, 2021;Mehmood et al, 2021); role of the regulator (Arora & Singh, 2020;Dong et al, 2021); market capitalization (Arora & Singh, 2020;Lan & Khoi Thach, 2022); economic performance of the country (Arora & Singh, 2020;Mehmood et al, 2021); monetary policies of the country (Adra, 2021;Arora & Singh, 2020;Tekatli, 2021); investor perception about the IPO and the market (Gupta et al, 2022;Lan & Khoi Thach, 2022;Mehmood et al, 2021) and performance of previous IPOs of the company, its peers and other companies amongst the others (Agarwal, Liu, & Rhee, 2008;Badru & Ahmad-Zaluki, 2018;Lan & Khoi Thach, 2022;Tajuddin, Mohd-Rashid,...…”

Divergence of beliefs and IPO initial return: the quasi-moderating role of investor demand

“…Moreover, the current study reports an average investor demand of 25.15 times, which is significantly lower than the findings of other studies such as Low and Yong (2011) and Albada et al (2019), where the authors reported an average investor demand of 33.59 times and 36.62 times, respectively. Furthermore, Malaysia has a relatively higher average subscription level as compared to other emerging economies like Bangladesh of 20.20 times (Rahman et al, 2017), Pakistan of 2.52 times (Mehmood and Mohd-Rashid, 2020) and India of 10.28 (Arora and Singh, 2020). In accordance with Chowdhry and Sherman's (1996) model, fixed-price regime issues are characterised by extreme OSRs in comparison to book-building issues, which is attributable to the high level of uncertainty.…”