Corporate governance and underpricing of small and medium enterprises IPOs in India

Abstract

Purpose The purpose of the paper is to examine the impact of corporate governance mechanisms, i.e. board structure and ownership structure on the underpricing of small and medium enterprises (SME) IPOs in India. Design/methodology/approach Most of the extant empirical research studies have either pivoted on mainstream IPOs or SMEs IPOs in developed economies, but the present study examines 200 SME IPOs issued during Feb 2012 to April 2017. Multiple regressions have been used to examine the impact of the corporate governance mechanisms on raw return (RR). Furthermore, robustness of the results has been verified through the employment of market-adjusted excess return (MAER) as an additional proxy of underpricing. Findings The results highlight that board size, inverse of board committees, board independence, board age, board directorships positively, and top ten shareholding negatively influence RR. Further, direction of promoter ownership variable indicates curvilinear relationship with underpricing. Other explanatory variables used in model lack statistical validity. Similar results have been obtained when variables were regressed against MAER with related board members being additionally significant in model. Practical implications The findings suggest that Indian investors do take cues from board structure and ownership patterns for making investment decisions in small- and medium-sized firms. Further, the results are also helpful to top management in structuring their boards. Originality/value The present research enriches SME IPOs underpricing literature because the impact of corporate governance mechanisms on unadjusted returns is relatively under explored particularly within the context of small- and medium-sized firms.

COVID-19 response: students’ readiness for shifting classes online

“…There is an opportunity to increase educational equityin the midst of these challenging timesby addressing the digital divide head-on, affirmatively examining inequities and investing in solutions that support access to and resilience of learning opportunities for all students across the country. To assist address the digital divide and allied accessibility issues, internet operators should ensure that internet connectivity is strong and also reduce the cost of internet bundles as Arora and Singh (2020) suggest that Indian investors should come forward and investment decisions in small-and medium-sized educational firms as well. The government should assist students to get laptops and tablets/smartphones as some students rated challenges with phones/laptops and connectivity as an important item.…”

Board characteristics, ownership concentration and SME IPO underpricing

“…Grounded on the corporate governance literature which professes that the endogeneity issues may engender biased and inconsistent estimates while examining the relationship between governance variables and organisational outcomes, the current study uses a two-stage least square estimator (2SLS) to address such issues. Backed by the prior research studies (Mak and Li, 2001; Larcker et al , 2007; Arora and Singh, 2020), it has been ascertained that board independence is endogenous which could lead to erroneous interpretation of data. As a result, the study used an instrumental variable approach to account for potential endogeneity that could skew our findings.…”

“…Limited research has focused on developing economies and how their typical governance structures differ from developed economies is still unclear. Various studies examining the impact of board structure and ownership structure on IPO underpricing, particularly in the Indian setting (Anand and Singh, 2019; Arora and Singh, 2020; Handa and Singh, 2017), are largely prescriptive and only analyse the direct link between the concerned variables. A significant research gap exists concerning the role of moderating variables in influencing organisational performance, especially IPO underpricing.…”

A comparative study of corporate governance practices of Indian firms affiliated to business groups and industries

“…We had the choice of either using a measure that past studies have used or create a new measure. Past studies have measured CG by various indicators such as board-based indicators (Arora and Sharma, 2016; Arora and Singh, 2020; Chen et al , 2006; Mathew et al , 2017), presence (or absence) of antitakeover mechanisms and the state of incorporation (Gillan et al , 2003; Bebchuk et al , 2009). In the US, states make their antitakeover laws sometimes.…”