Relationship between Underpricing and Post IPO Performance: Evidence from Indian IPOs

Abstract

Deterioration in post IPO operating performance is a well-established fact in financial economics literature. The current article extends this discussion by exploring the relationship between post IPO performance deterioration and underpricing. Level of underpricing is used as a proxy for signalling. The analysis was done by dividing the whole sample into two groups: low underpricing group and high underpricing group and then examining the trend in post IPO performance deterioration for both the groups. The expectation was that the group with low underpricing would show more deterioration in performance than group with high underpricing. Study found that overall performance of firms deteriorated for both the groups but the difference in trend was not found to be significantly different and hence the difference in change in performance for both the group cannot be attributed to underpricing. Our results supported the results obtained by Jain and Kini ( 1994 ), Jegadeesh, Weinstein and Welch ( 1993 ) and Garfinkel ( 1993 ). However, like Jain and Kini ( 1994 ) we also do not conclude against signalling model.

Earnings Management and Performance of IPO Firms: Evidence from India

“…To estimate the coefficients of the model, an estimation sample consisting of 2,302 firms is constructed after excluding financial companies, companies with a different financial year, merged companies and companies with insufficient data from 5106 BSE listed companies as on 10 April 2018. Companies that got listed after 31 March 2009 have been excluded from estimation sample, as these companies constitute sample IPO companies for present research (Mayur & Mittal, 2014). After getting the estimation sample (industry), total accruals are regressed on adjusted change in revenues, gross property, plant and equipment for each industry firm i , as follows: …”

Earnings management and listing day performance of IPOs in India

“…Altogether, the findings of the study reveal that listing day returns in India are not only a market phenomenon, but also the result of accounting manipulation, which is a serious concern. The long-run underperformance of Indian issuers is the result of higher listing day returns (Dhamija and Arora, 2017;Hawaldar et al, 2018;Jain and Padmavathi, 2012;Krishnamurti and Kumar, 2002;Madhusoodanan and Thiripalraju, 1997;Mayur and Mittal, 2014;Sahoo and Rajib, 2010). The positive relationship between earnings management and listing day returns suggests that the relationship between post-issue underperformance is due to earnings management practised during the issuer year.…”

“…In the words of the chairman of the Securities Exchange Board of India (SEBI), Ajay Tyagi, "the credibility of our markets is at stake when many of the newly listed stocks are trading below their offer price" (Shette et al, 2016). Apart from this, considerable literature (Dhamija and Arora, 2017;Hawaldar et al, 2018;Jain and Padmavathi, 2012;Krishnamurti and Kumar, 2002;Madhusoodanan and Thiripalraju, 1997;Mayur and Mittal, 2014;Sahoo and Rajib, 2010) available on listing day returns in India also depicts higher listing day returns and lower post-issue returns in India because of underpricing.…”

Lead Manager’s Reputation and Aftermarket Survival of Initial Public Offerings: Empirical Evidence from India

“…Every private company has a great desire to become public through the route of IPO because the rewards and opportunities available to a public company cannot be enjoyed by private companies. Apart from their perceived importance for several constituents of IPO market, the IPOs have exhibited certain anomalous behaviour, namely, short-run underpricing, long-run underperformance and hot issue phenomenon (Allen & Faulhaber, 1989;Bhabra & Pettway, 2003;Chi, McWha & Young, 2010;Jain & Kini, 1999;Kooli & Suret, 2004;Mayur & Mittal, 2011;Miloud, 2009;Ritter, 1991). While most of the researchers have evaluated the success of IPOs in terms of these three anomalies, there is another phenomenon that is equally significant yet has not been considerably explored, that is, success of IPOs in terms of their survival in the aftermarket.…”