Performance of IPOs of Indian Companies Backed by Private Equity

Abstract

We examine 616 Indian initial public offerings (IPOs), including 116 IPOs backed by private equity (PE), between 2000 and 2016, to test whether PE-backed IPOs perform better than non-PE-backed IPOs in the short run as well as in the long run in terms of cumulative abnormal returns (CARs). We also examine the impact of the PE firm nationality on post-IPO performance. Consistent with the existing literature, we find underperformance for all IPOs, on an average, within 1 year. However, PE-backed IPOs have lower degree of underperformance than non-PE-backed IPOs. We also find that size, liquidity and leverage have a positive impact on the post-IPO performance after the financial crisis, whereas issue amount and capital issue year are negatively correlated to CARs before and during the crisis. We also find significant effects of PE firm nationality on CAR development. IPOs backed by India-dedicated PE firms perform best, while those backed by foreign PE firms perform worst and even underperform non-PE-backed IPOs. IPOs by foreign PE firms perform better if they co-invest with India-dedicated PE firms.

The Tradeoff Between Private Equity Sponsorship, Board Centrality, and Experience as Credible Signals for IPO Performance

“…Many IPO studies use underpricing (usually measured as the one-day CAR or simply as the return measured by the first day closing price to launching price) and other performance variables associated with the firm's valuation upon the IPO event. While we recognize the benefit of these popular metrics, we preferred to use one-year CAR due to five reasons: (1) Its previous usage in signaling and IPO literature (Bruton et al, 2010; Drebinger et al, 2019; Gao & Jain, 2011; Gibbs & Hao, 2018); (2) Underpricing fails to assess short-term performance (Park, Borah, & Kotha, 2016); (3) The signaling effect of PE funds tends to be durable and prominent over long periods of time (Arikan & Capron, 2010); (4) In several contexts, floating prices after the IPO event suffer several distortions, such as partial adjustment (Bradley & Jordan, 2002), in which underwriters proposedly establish an issuing price below the market value estimated during the book building process, in order to compensate institutional investors for disclosing information. Such distortions eventually fade out during the first year upon the IPO; (5) The investors in Brazil still need credible signs to assess the quality of the management after one-year of issuance.…”

“…In emerging markets, the positive effects tend to be more significant and consistent. For example, in India, Drebinger, Rai, and Hinrichs (2019) point out that private equity-backed IPOs perform better than non-backed IPOs both in the short and long run. Sivaprasad and Dadhaniya (2020) find a similar result both regarding operational performance and stock prices.…”