Firm Financing through IPOs: A Study of Causal Variables Responsible for Under-Pricing

Abstract

One major source of business financing is through Initial Public Offerings (IPOs). Historically, IPOs received high initial first day gains compared to the market performance. These gains reflect external factors and not the company's true value, thereby suggesting the under-priced IPO. The recent researches on IPOs in different markets for different industries in various countries, have focused on under-pricing and show that the under-pricing is evident in case of book-building route as well as fixed price-band offers. This study attempts to identify causal variables behind high initial gains for Indian IPOs using earlier researches and testing them over a sample of Indian IPOs to examine the influence of non-fundamental factors and signalling effects on under-pricing

Pricing and performance of IPOs: Evidence from Indian stock market

“…This study finds that IPOs in India are underpriced based on their performance on the first trading day. The finding of this study is consistent with the findings of Narasimhan and Ramana (1995), Madhusoodanan and Thiripalraju (1997), Karmakar (2002), Chaturvedi et al (2006), Sehgal and Singh (2007), and Garg et al (2008). Bora et al (2012) reported that Indian IPOs are underpriced when measured using offer price and the opening price on listing day (which is again consistent with our measure using the same prices).…”

“…Study also revealed that premium issues are underpriced than par issues. Attempting to identify the causal variables responsible for underpricing of Indian IPOs, Chaturvedi, Pandey, and Ghosh (2006) found that the extent of oversubscription of an IPO determines the first day gain; signals that lead to oversubscription are market index during the period of IPO, type and nature of business, foreign collaboration, or the track record of promoters/company. Garg, Arora, and Singla (2008) also documented that Indian IPOs are significantly underpriced and noted that the level of underpricing does not vary much in the hot and cold IPO market.…”

Initial and After-market Performance of SME IPOs in India

“…The IER varied between a high of 243.4 per cent to a low of -28.8 per cent with a standard deviation of 31.80 per cent. The level of underpricing is lower than the underpricing reported on the main board exchange in the earlier studies (see Chaturvedi, Pandey, & Ghosh, 2006;Ghosh, 2005;Handa & Singh, 2015;Kumar, 2007;Reddy, 2015;Sehgal & Singh, 2008). It indicates that the issues on the SME platform are relatively more fully priced.…”

Windows of opportunity and seasoned equity offerings: An empirical study

“…The study finds that IPOs with larger issue size, belonging to business groups, are more underpriced than their stand-alone counterparts and, subsequently, such firms raise more funds from the market. Chaturvedi, Pandey, and Ghosh (2006) find that the extent of oversubscription determines underpricing of an IPO; oversubscription, in turn, depends on market index during the time of IPO, type and nature of business, foreign collaboration and tracks record of promoters/company. Garg, Arora, and Singla (2008) also document that IPOs in India are significantly underpriced; they have also noted that the level of underpricing does not vary much in the hot and cold IPO market.…”