Impact of Auditor and Underwriter Reputation on Underpricing of SME IPOs in India

Abstract

Small and medium enterprises (SMEs) being relatively new, young and with little operating history tends to suffer from the problem of information asymmetry and ex ante uncertainty. This problem can be reduced through the use of various signals in the initial public offering (IPO) process. Hence, this study attempts to shed some light on the signalling role of prestigious auditors and underwriters and their interacted effects on IPO returns in an emerging market like India. Cross-sectional data comprising of final 286 SME IPOs issued during February 2012–March 2018 listed on the BSE SME platform and NSE EMERGE have been taken into consideration. Multiple regression analysis has been used to empirically test the signalling role. The results reveal that underwriter reputation helps in reducing information asymmetry and signals firm quality to investors. Underwriter reputation documents a positive relationship while auditor reputation lacks statistical significance. The negative relation of interaction effect of auditors and underwriters reveal that underwriter reputation plays a significant role in positively influencing investors’ perception and assisting them in taking investment decisions.

Auditors, Underwriters, and Firm Owners’ Interaction in an IPO Environment: The Case of OECD Nations

“…As reported by Allen and Faulhaber [6], Grinblatt and Hwang [40], Welch [7], and Arora and Singh [10], the interaction between the auditors and the underwriters supports the IPO firm's standing and signifies firm credence. The interaction outcomes are expressed by the higher initial returns due to a rise in the secondary market demand for IPOs.…”

“…As postulated, a positive association is reported for the relationship between interacted 'underwriters' and auditors' reputation' and IPOs' first-day returns on the full sample. The alliance between prestigious auditors and underwriters is signaling the coalition to the marketplace; reducing uncertainty, asymmetric information, and firm risk [10,32,33] whilst effectively boosting firm value. As a result, the alliance creates an upsurge for the IPOs in the secondary market and consequently increases the IPOs' first-day returns.…”

“…Studies on the reputations of auditors and IPOs by DeAngelo [8] and Shapiro [9] show that prestigious auditors are more likely to take on quality jobs with higher audit fees. Therefore, the reputation of auditors acts as an indicator of firm quality [10] which consistently assists in minimizing the asymmetric information between firm owners and all stakeholders. Audited results play a crucial role in addressing the information asymmetry between firms (private to public company information) and stockholders.…”

Under Invoicing in the Residential Real Estate Market in Pakistan

“…The reputation of the housing authority is considered an important determinant of under invoicing of real properties. Previous studies related to financial markets (Arora & Singh, 2019;Chen et al, 2013;Jeribi, 2015), especially initial public offerings (IPOs), considered the underwriter's prestige as important factor in pricing of IPOs.…”

Valuing local and dual-class IPOs in the Alternative Investment Market

“…A theory purporting to explain the price performance of IPOs in the aftermarket is related to the prestige of the underwriters (Migliorati & Vismara, 2014). This theory suggests that the luster of the underwriter's reputation is inversely associated with the magnitude of underpricing (Arora & Singh, 2019).…”