Effect of Composition of Board and Promoter Group Retained Ownership on Underpricing of Indian IPO firms: An Empirical Study

Abstract

The present empirical investigation is an addition to the existing extant literature available on the issue of initial public offering (IPO) which sees its inherent anomaly of underpricing by linking it to some of under-researched dimensions of corporate governance in the emerging economy of India. This study incorporates about 443 Indian IPO firms with their board composition and ownership retained by promoter group post IPO being primary variables of focus which are obtained from respective prospectuses of such firms. Like many previous studies, this study also keeps signalling theory as base, and findings show that only interlocking of directors among all the board variables has a significant and negative relation with underpricing. Significant relation of ownership concentration in hands of promoter group with underpricing shows that it is considered as a signal by investors assisting them in gauging safety of their minority interests. Findings show that too high insiders’ ownership alignment of interest between promoters and minority holders turn into risk of entrenchment by initial investors, that is, promoters as perceived by investors.

Earnings management and listing day performance of IPOs in India

“…Since then, several studies focusing on various aspects of underpricing demonstrate that shareholders earn listing day positive returns on the day of listing due to deliberate efforts of the issuers. The findings of contemporary research studies (Agustina and Clara, 2021;Anand and Singh, 2019;Arora and Singh, 2021;Bottazzi et al, 2016;Chhabra et al, 2017;Darmadi and Gonawan, 2013;Handa and Singh, 2015;Hanley and Hoberg, 2008;Leone et al, 2007;Liu and Zhou, 2020;Malachowski and Gadowska-dos Santos, 2021;Xu et al, 2017;Zhou et al, 2020) presents results similar to that of earlier studies (Baron, 1982;Baron and Holstroms, 1980;Chalk and Peavy, 1987;Ritter, 1984). The studies show a considerable presence of underpricing and its relationship with earnings underperformance, stock underperformance, corporate governance, IPO grading, prospectus quality and corporate disclosure.…”

Conservatism and Initial Public Offerings (IPOs) Underpricing: An Audit Quality Perspective

“…In other words, as long as the information asymmetry is high, companies with low-cost IPOs provide a positive signal and incentive for investors (Drobetz et al, 2005;Yong, 2007Yatim, 2011. Other factors, including weaknesses in corporate governance, the reputation of consumers, managers' conservatism, and weaknesses in supervisory and control quality that revolves around the hypothesis of information asymmetry and signaling theory can also shape this phenomenon (Beatty and Ritter, 1986;Cliff and Denis, 2004;Albring, et al, 2007;Yatim, 2011;Chen et al, 2012;Lizińska and Czapiewski, 2018;Wong et al, 2017;Yu et al, 2019 andAnand and.…”