The long-run performance of SME IPOs in India: empirical evidence from Indian stock market

Abstract

Purpose The purpose of this paper is to study the pattern of long-run performance of small and medium enterprises (SMEs) initial public offerings (IPOs) and examine the firm- and issue-related determinants of long-run performance of SME IPOs in India. Design/methodology/approach The 3 6, 9 and 12 months share returns of Indian SME IPOs is studied using event time methodologies, i.e. buy and hold returns, cumulative abnormal returns and wealth relatives on a sample of 375 SME IPOs issued during February 2012 to May 2018. Additionally, ordinary least square regression has been used to investigate the determinants of long-run performance of SME IPOs on a reduced sample of 104 because of non-availability of price observations. Findings The findings reveal that Indian SME IPOs exhibit long-run overperformance contradicting the international evidences of underperformance, and this overperformance is significantly evident using buy and hold abnormal return (BHAR). Furthermore, based on the divergence of opinion hypothesis, fads theory and windows of opportunity hypothesis, the results reveal that on one hand, issue size and oversubscription negatively affect BHAR, while on the other hand, auditor reputation, underwriter reputation, hot market, underpricing, inverse of issue price, profits prior to listing positively affect long-run performance. However, firm age, firm size, debt equity ratio, volatility and long-run performance computed through BHAR lacks significant relationship. Research limitations/implications The study relied on event time methodology of measuring aftermarket performance of one year because of the limited availability of price offerings. Hence, the study could be extended to analyze aftermarket returns over a period of three to five years to enable reaching the vivid conclusions. Calendar time methodology may also be used to compute abnormal returns. Practical implications The results based on the study provides an implication to the investors by providing them an opportunity to bank higher long-run returns by engaging in active and timely trading strategies. Nevertheless, the results also show that investors should be cautioned while taking investment decisions. Originality/value The study contributes to rising body of international literature by analyzing the larger and recent sample of IPOs issued from 2012 to 2018 listed on SME exchange.

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.…”

Fear of the COVID-19 pandemic and IPO aftermarket liquidity in ASEAN-5

“…Offer size is also related to the liquidity of the stock. Firms with good quality and stability typically provide a more significant size scale (Rahman and Che-Yahya, 2019) and less uncertainty (Arora and Singh, 2021). Market characteristics are reflected by MR-1 , which denotes the one-day lag market return for each country.…”

Studies on Indian IPO: systematic review and future research agenda

“…Studies have also identified that short term over performance of IPOs of companies increases the expectations of potential investors and leads to a subsequent decline of long run Studies on Indian IPO performance (Bhatia and Singh, 2013;Gopalaswamy et al, 2008;Dhamija and Arora 2017a;Kohli, 2009;Mangala and Dhanda, 2019;Marisetty and Subrahmanyam, 2010;Mayur and Mittal, 2014). Contradicting this, Indian SME IPOs exhibit long-run over performance (Arora and Singh 2020b;Dhamija and Arora 2017c). The underpricing level of SME IPOs is also lower than that of the IPOs listed in other board of stock exchanges (Dhamija and Arora 2017c).…”