A Study of Underpricing of Initial Public Offers (IPO) and its Impact on Performance of IPO Stocks in Indian Financial Markets

Abstract

Post liberalization of primary markets in the year 1993, the Indian market has moved closer to the world economy. As such, the policy changes and regulations of the Indian primary market have dynamically advanced as per the requirements of the economy. The present study attempts to understand the Underpricing of IPOs in the Indian market post liberalization and their influence upon performance of IPO stocks in both the long and short term performances. Review of extant literature suggests that the underpricing has significant impact upon the performance. There is dearth of longitudinal studies of underpricing impacting the performance of the IPO stocks in both long term and short term in the Indian context. IPO performance data for the period 2000-2010 is used for this study. To eliminate abnormalities arising from ‘internet bubble’, data from pre-2000 era was not used for the analysis. Study has applied the ordinary least square regression analysis for analyzing the relation between two variables. The study found that underpricing has significant impact upon short term performance and subscription rate. The contribution of underpricing in the performance decreases with the tenure i.e. the underpricing has larger contribution in short term than long term.This study has significance in guidance for formation of IPO portfolios in terms of tenure to be invested, composition of the portfolios to be formed in Indian financial markets.

Keywords: underpricing, IPOs, India, performance, subscrition rate, offersize