Market timing and pseudo market timing: an empirical examination of IPOs in India

Wadhwa, Kavita; Syamala, Sudhakara Reddy

doi:10.1108/mf-01-2017-0006

Cited by 5 publications

(10 citation statements)

References 22 publications

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“…Since the liberalization reforms of 1992, the Indian capital market has evolved tremendously (Saith, 2008;Sayed, 2017;Dayanandan and Sra, 2018;Tiwari and Vidyarthi, 2018). Indian investors, regulators and government introduced and adopted various measures to improve the institutional settings [1] in the country (Wadhwa and Reddy, 2018;Saith, 2008). Indian capital markets are regulated and monitored by the Ministry of Finance, The Securities and Exchange Board of India and the central bank of India, Reserve Bank of India.…”

Section: Introductionmentioning

confidence: 99%

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

Sivaprasad

Dadhaniya

2019

JAEE

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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.

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Section: Introductionmentioning

confidence: 99%

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

Sivaprasad

Dadhaniya

2019

JAEE

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“…frontier approach (2005) has characterized "hot issue" markets by high IPO volumes and high levels of initial return and therefore these two dummy variables are taken to distinguish between hot and cold market condition of new issues market activity (Reber and Vencappa, 2016;Wadhwa and Syamala, 2018). In this study, we test the following hypothesis: H7.…”

Section: Stochasticmentioning

confidence: 99%

Deliberate underpricing and after-market mispricing in Indian IPO market: Stochastic frontier approach

Mulchandani

Pandey

Debata

2023

JIBR

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Purpose This paper aims to study the underpricing phenomenon of initial public offerings (IPOs) of 355 Indian companies issued from 2007 to 2019. The research question this paper empirically examines is whether Indian corporate executives deliberately underprice IPOs from its fair value to attract investors, thereby causing an abnormal spike in the prices on the listing day. The findings of this study challenge a commonly held notion of leaving money on the table by IPO issuing companies. Of the overall average listing day returns of 17%, the deliberate premarket underpricing component is found to be mere 5.3%, while the remaining price fluctuation is, inter alia, a result of market momentum along with the unmet demands of impatient investors. Design/methodology/approach Following Koop and Li (2001), this study uses Stochastic frontier model (SFM) to study a routine anomaly of disparity between the primary market price (i.e. IPO issue price) and the secondary market price (listing price). The jump in the issue price observed on a listing day is decomposed into deliberate premarket underpricing component that reflects the extent of managerial manipulation and the after-market misvaluation component attributable to information asymmetry and prevailing market volatility. Findings This paper uses SFM to bifurcate initial returns into deliberate underpricing by managers and after-market mispricing by noise traders. This study finds that a significant part of the initial return is explained through after-market mispricing. This study finds that average initial returns are 17%, deliberate premarket underpricing is 5.3% and after-market mispricing averages 11.9%. Research limitations/implications This study can isolate underpricing done at the premarket by estimating a systematic one-sided error term that measures the maximum predicted issue price deviation from the offered price. Consequentially, the disaggregation of initial returns may be especially informative for retail investors in planning their exit strategy from an IPO by separating the strength of the firm's fundamentals and its causal relationship with the initial returns. Substantial proportion of after-market mispricing implies that future research should focus on factors causing after-market mispricing. As underlying causes are identified, tailor-made policy responses can be formulated to benefit investors. Practical implications This paper has empirically validated that initial return is a mix of both components, i.e. deliberate underpricing and aftermarket mispricing. This disaggregation of initial returns can prove helpful for investors in planning their exit strategy. This study can help investors to become more aware of the importance of the fundamentals of the firm and its causal relation with the initial returns. This information in turn can help reduce the information asymmetry amongst investors and help them lessen the costs of adverse selection. Originality/value A large number of research studies on IPO pricing find overwhelming evidence of underpricing in public issues. This research attempts to decompose the extent of underpricing into deliberate underpricing and after-market mispricing, thereby supplementing the existing literature on the IPO pricing puzzle. To the best of the authors’ knowledge, this study is the first contribution to the literature on initial return decomposition for the Indian capital markets.

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“…Dhamija and Arora (2017) examined 377 IPOs in India offered during 2005–2015 found that the lead manager prestige, market conditions and market sentiment have no effect on IPO performance. Wadhwa and Syamala (2018) found that in India, at the aggregate level, firm-specific market timing, aggregate market timing, and pseudo-market timing are important factors.…”

Section: Literature Reviewmentioning

confidence: 99%

A comparative analysis of long-term performance of construction and non-construction IPOs in India

Singla

2019

ECAM

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Purpose The purpose of this paper is to analyze the long-term performance of construction sector initial public offers (IPO) made in India during 2006–2015. The study aims to compare the performance of the construction sector IPOs with the non-construction sector IPOs and finds the determinants of long-term performance of construction sector IPO with a time horizon of three years. The study also attempts to find out, if the long-term IPO underpricing that has been discussed in the literature, really exists or it is a myth. Design/methodology/approach The study uses data of IPOs listed on National stock exchange during 2006–2015. In total, 281 IPOs are considered for the study, among which 44 are construction sector IPOs. IPOs anniversary performance of three successive years is calculated from the date of listing, and a random effect panel regression model with clustered robust estimates using the maximum likelihood method is performed to find out the determinants of IPO performance. The data are also tested for multicollinearity, stationarity and heteroscedasticity to ensure the robustness of results. Findings The results show that in the long-run construction sector IPOs outperform the non-construction sector IPOs, though the performance is below average when compared to market returns. The IPO underpricing is a myth, and IPO underperformance is a reality in India. The performance of construction sector IPOs is driven positively by market return, size of the firm and negatively by liquidity of the firm. Originality/value The paper is the first attempt to analyze the performance of construction sector IPOs, and compare it with non-construction sector IPOs. The study uses a random effect panel regression model with robust estimates using the maximum likelihood method to ensure the robustness of results. This is the first time the performance of IPOs is studied with a panel data approach.

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Market timing and pseudo market timing: an empirical examination of IPOs in India

Cited by 5 publications

References 22 publications

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

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

Deliberate underpricing and after-market mispricing in Indian IPO market: Stochastic frontier approach

A comparative analysis of long-term performance of construction and non-construction IPOs in India

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