Grey Market for Indian IPOs: Investor Sentiment and After-Market Performance

Abstract

Extant research on developed markets shows that investor sentiment is a prominent feature in IPO grey markets. There is sparse work in the context of emerging markets. We fill this lacuna by studying the working of the Indian IPO market. We consider this work interesting and relevant for the following reasons. First, grey market trading always involves short-selling as securities are not yet available. Since legal and institutional environment is less developed in emerging markets, the functioning of grey markets is of interest to policy makers and financial economists. Second, retail investors participate to a greater extent in IPOs of emerging markets, ostensibly due to the relative paucity of institutional investors. Since prior research has shown that retail investors are more prone to overreaction, it is useful to examine if grey market prices proxy for investor sentiment. Finally, if grey markets are associated with price distortion in initial trading prices, then investors can potentially exploit this by using trading strategies. Our empirical results show that grey market prices are predictable and that these prices are associated with initial listing returns. Furthermore, selling at grey market prices and subsequent short-covering is shown to be profitable.

Keywords: Grey Market, Initial Public Offerings, Investor Sentiment

JEL Classification: G12, G14, G32