Pricing and performance of initial public offerings in India

Abstract

This study examines two anomalies related to Initial Public Offerings in the Indian Market – (i) initial (under) pricing of IPOs & (ii) long run (under) performance in the post-listing period. On a study of 356 IPOs (340 Book Building & 16 Fixed Price) that went public between 2007 & 2019, we observed an average market-adjusted under-pricing to the extent of 17.36%. The analysis also revealed higher under-pricing in case of fixed price issue as compared to the book building issue. Offer for sale, price-to-book ratio, auditor’s prestige & promoter holding were found to be significant determinants of the initial excess return. However, this initial excess return does not sustain in the longer time horizon. On analyzing long-run performance (36 months) of a sample of 280 IPOs, we found that investors tend to lose (on an average) around 42% if they invest on the day of listing & hold for 36 months. Only 53 out of 280 IPOs outperformed the benchmark over 36 months. Offer for sale, promoter’s holding, return on assets and auditor’s prestige were found to be key elements in determining the post-listing performance. Further, the long run performers demonstrated higher return on assets, higher dividend rates & lower P/E ratio.