Initial Returns, Long Run Performance and Characteristics of Issuers: Differences in Indian IPOs Following Fixed Price and Book building Processes

Abstract

Initial returns (or underpricing) and long run performance of IPOs have been researched extensively across countries. Recent research on IPOs has also been focused on differences in pricing and allocation mechanisms across countries. Indian IPO markets provide a natural setting for comparing the characteristics of issuers, initial returns and long run performance of IPOs coming out with fixed price versus book building route. On a sample of 84 Indian IPOs (20 book-build and 64 fixed-price) from the period 1999 to 2002, we find that the fixed price offerings are used by issuers offering large proportion of their capital by raising a small amount of money. In contrast, book building is opted for by issuers offering small proportion of their stocks and mobilizing larger sums of money. Unlike in the early nineties, the activity in Indian IPO markets is now increasingly following trend of “industry-specific waves” of IPOs as most of the IPOs in our sample are from sectors, which were “hot” during the period. Consistent with the evidence from other countries, initial returns are higher and more uncertain on fixed price offerings. Again in line with evidence elsewhere, all types of Indian IPOs in our sample under performed in the first two years subsequent to listing. We also find some evidence that the IPOs from issuers belonging to industries under the spell of “hot issue” market, under perform more than the rest.