Underpricing of initial public offerings: an empirical analysis of Indian IPO market

Abstract

Initial Returns (Underpricing) of IPOs and long run (under)performance of IPOs is studied extensively across countries and across time. On a sample of 110 public issues in the Indian market across a 4 years time (2002 – 2005), it is found that the extent of underpricing and the post listing returns is significantly related to the number of times the issue was oversubscribed. In addition, the return varied significantly in case of IPOs and in case of seasoned equity offerings. Though long run underperformance of IPOs is found in many countries, but for the public offers during the sample period in the present study it was found that the stocks performed better than the market (180 days post listing) and the average excess return was as high as 17.36% (Median – 18.02%). The extent of correlation between performance of the stocks and number of times oversubscribed was highest in case of retail investor category as compared to the non-retail and institutional investor category. This could imply two things – the post issues prices are guided more by the demand from retail investors than institutional investors or the retail investor make a better judgement of the price.