Edifying role of corporate reputation in new issue market: Indian evidence

Abstract

Purpose The purpose of this paper is to examine the relationship between corporate reputation and initial public offering (IPO) underpricing for a sample of 269 IPOs hitting the Indian capital market for the first time during the period ranging from April 1, 2007 to November 8, 2016. Design/methodology/approach The study is based on secondary data (of 269 Indian companies going public) obtained from websites of capital market, Chittorgarh and Securities and Exchange Board of India (from where prospectus of each company was downloaded individually to extract data on financial variables). The study devises the technique of multivariate regression analysis to arrive at the results. Findings The results of the study reveal that corporate reputation serves as a signal to naive investors that assures them of issuer company’s credibility, resulting in lower underpricing. In addition to it, the study also observes the level of gender diversity on Indian boards. It is disappointing to notice low level of female representation on Indian boards and the improvement if any made in the number of female directors on Indian boards is due to provisions of new companies’ act, 2013 that mandates at least one women director on the board of every listed company. Thus, females do not constitute a critical mass on Indian boards. Research limitations/implications The current study scrutinizes the impact of corporate reputation on IPO underpricing only. Furthermore, the study analyzes the underpricing of only book built IPOs. Incorporating both book built and fixed price IPOs could have provided better insights into the issue. Practical implications The study outlines significant implications for managers of issuer company to portray company’s own reputation as a signal instead of showcasing borrowed reputation of external agents at the crucial juncture of going public. Originality/value Many signals portraying quality of the offering are sent by issuer company in public arena to make IPO launch a successful event. Among many such signals like underwriting reputation, auditor reputation, director’s and CEO’s reputation, the corporate audience has started giving more impetus to issuer company’s own reputation. Thus, financial academia witnessed a paradigm shift from external agents reputation to internal agent’s reputation and now the loci of interest has shifted to company’s own reputation. Giving emphasis to corporate reputation seems more relevant in emerging economies like India where naive investors rely on their own judgments while making investment decision who take clue from various signals to infer quality of the offer. It is momentous to observe whether reputation of the company acts as a conspicuous signal to decipher IPO quality. Furthermore, there hardly exists any empirical research directly examining the impact of corporate reputation on IPO underpricing in the Indian context. Hence, the present study is a modest attempt to fill this gap in literature.

An Investigation of How Firm Size Affects Firm Value through Corporate Reputation

“…Several literature reviwes show that corporate reputation is a process that is built on a comprehensive concept, namely the determinants and consequences (Fomrun, 2012;Ali, et al, (2015). Several empirical evidences related to this have partially substantiated the findings, including the effect of firm size on reputation (Kaur and Singh, 2019b); and a theoretical study of the consequences of corporate reputation on firm value (Misani, 2017). Based on the theoretical arguments and empirical findings above, this study was conducted to comprehensively test the model, namely by testing firm size as a predictor of firm reputation and its impact on firm value.…”

“…People prefer to do business with reputable companies (Herwin and Abadi, 2018). However, it is not easy for companies to gain a good reputation (Kaur and Singh, 2019b). In general, companies will pay attention to factors outside the company.…”

“…In general, companies will pay attention to factors outside the company. Kaur and Singh (2019b) state that company size is the best indicator in determining a company's reputation. Kaur and Singh, (2019b) explain that firm size is a proxy for explaining the quality and corporate reputation.…”

“…Kaur and Singh (2019b) state that company size is the best indicator in determining a company's reputation. Kaur and Singh, (2019b) explain that firm size is a proxy for explaining the quality and corporate reputation. The size of large companies builds on the public assumption that companies will have better growth opportunities.…”

How discounts impact IPOs valuation performance and underpricing? A confrontation between warranted and unwarranted discounts

“…Studies document a negative correlation between underpricing and reputation, whether of underwriters or auditors (Albada et al, 2019a(Albada et al, , 2019bD. Sundarasen, 2019;Kaur and Singh, 2019;Kenourgios et al, 2007;Ong et al, 2020;Pratoomsuwan, 2012). Issuers seem to accept the costs of hiring reputable underwriters or auditors.…”