Relative effectiveness of signals in IPOs in Indian Capital Markets

Abstract

IPO by a firm calls for assessment of potential agency problems and associated costs by the outside investors. The potential conflict of interest problems between insiders and outsiders could be very high in countries with weak corporate governance mechanisms like India. Theoretically it could be argued that there are quite a few signals related to the firms in the IPO context and available to the investors, which could be used by them to assess the quality of firms. Based on cross-sectional data of 1243 IPOs in Indian markets during 1993-95 period, we find that the under-pricing (or realized excess returns), inside equity and pre-public offer firm reservations made for institutions and mutual funds explain the extent of over subscription across IPOs. The type of agency appraising the project and presence or absence of foreign financial and/or technical collaborators fail to explain the extent of over subscription across IPOs. In addition, we find that subscription rate rather than realized initial returns as dependent variable sheds more light on the effect of signals in a fixed-price open offer IPO process characterized by listing with considerable lag.