An empirical analysis of the performance of sponsored vs non-sponsored IPOs

Abstract

Purpose India is one of the largest IPO markets in the world. However, IPO research in the developing world is limited. The purpose of this paper is to test the performance of Indian IPOs based on sponsored vs non-sponsored issues. The authors classify the IPO sample into venture capital (VC) and private equity (PE) sponsored issues and non-sponsored ones and include key operating characteristics as performance predictors. Design/methodology/approach The dependent variable is the buy-and-hold abnormal returns. The study uses key operating characteristics such as market capitalization, net sales, earnings before interest, taxes, depreciation and amortization, depreciation and amortization, price-to-book, asset turnover and leverage. A cross-sectional analysis is applied to test the long-run performance. Findings Sponsored IPO issues convey favourable information to investors about future earnings and prospects of the firm. The findings indicate that sponsored issues and, in particular PE sponsored issues are perceived by investors as having a positive impact on the operational performance of firms that the PE firms are involved in relative to the constituents of the index and this superior operational performance over time also leads to relatively better performing share prices. There are significant differences in terms of market size, industry classification and key operating characteristics across the three groups of issues. Research limitations/implications This study has had to deal with much smaller samples of PE and VC when compared to similar studies conducted in the developed markets such as the UK and the USA. Further robustness tests on the market performance using factor models posed a problem due to limitation of the availability of these factors. Practical implications For the capital markets investors and policy makers, this research demonstrates the increasingly important role that PE and VC funds play in the investment landscape in India. It exhibits the increasing investor confidence in the Indian capital markets. Originality/value Using a sample of Indian IPOs comprising VC sponsored and PE sponsored issues, this study analyses the performance of Indian IPOs in an emerging market setting. This study, thus, contributes to the limited IPO research undertaken in developing markets.

The Impact of Private Equity and Venture Capital on Companies’ Post IPO Performance: evidence from China

“…These differences are concluded as PE backed firms have greater scale, better profitability, comparatively modest first day-return, exceeding both other stand alone companies and market index with regard to market performance. Other similar findings are reached by Sheeja and Roshni [5], they argue that due to the fact that PE/VC backed IPO always contain the positive sign on possible future profits as well as the upcoming prosperity of the company, investors will hold the belief that PE backed issues have certain positive influence on practical performance of companies, which arises from the involvement of PE firms with the index. As a result, this practical performance will be attributed to higher stock price, compared with those unbacked companies' stock price.…”

Establishing the antecedents of accountant’s job satisfaction in an emerging market

“…India is one of the largest emerging economies in the world (Zaidi et al , 2017) and many studies, such as those by McKinsey and company (2018), have used varied metrics such as private equity investments between 2003 to 2017, which were about US$97bn, to highlight the international acknowledgement of Indian growth. As per Sivaprasad and Dadhaniya (2020), India is a popular emerging market with high potential as evident from metrics such as its first rank in initial public offer volume in 2018 (EY Global Trends Report, 2018). Ever since India embarked on liberalisation reforms in 1992, the Indian capital markets have evolved tremendously (Tiwari and Vidyarthi, 2018).…”

The Tradeoff Between Private Equity Sponsorship, Board Centrality, and Experience as Credible Signals for IPO Performance

“…For example, in India, Drebinger, Rai, and Hinrichs (2019) point out that private equity-backed IPOs perform better than non-backed IPOs both in the short and long run. Sivaprasad and Dadhaniya (2020) find a similar result both regarding operational performance and stock prices. In China, where there is strong state influence on the capital market, a hybrid type of private equity – private placement of public equity securities, also known as private equity placement (PEP) – has shown a significant effect on the long-term performance of firms where such funds are participants (Dong, Gu, & He, 2020).…”