Short Run and Long Run Dynamics of Initial Public Offerings: Evidence from India

Abstract

This paper investigates the short run as well as long run underpricing of the Initial Public Offerings in the Indian Capital markets by looking at the different factors affecting them. As the underwriters do not have discretionary power in Indian IPOs, some of the theoretical models like Rock's (1986) and costly information acquisition hypothesis (1989), which involves the extent of informed as well as uninformed investors can be tested more robustly in Indian Capital markets. Therefore a model is proposed taking these oversubscription variables along with age and issue size to explain the underpricing. Since different sectors have different level of private and public information, it is interesting to perform industry wise analysis and has been taken up here. The period for study was 22 months (Jan, 2006- Oct, 2007) considering 116 IPOs. It was found that both short and long run return of IPOs are positive for this period. The short run underpricing was 18% and long run underpricing was 11.5%. Oversubscription variables, namely, total oversubscription, informed (institutional investors) and uninformed investors (retail investors) oversubscription, were found to be the main determinants of underpricing in the Indian IPOs. Higher subscription implied higher underpricing. However, informed investor's oversubscription was higher in companies giving more return in the long run. Further Indian Capital markets were found to follow industry specific waves. Upon doing sector wise underpricing analysis, the high performing sectors were more underpriced in the short run as well as performing better in the long run than low performing sectors. Infrastructure, financial and entertainment sectors with positive long run return fell under this category for the period of study. On the contrary, IT sector gave higher initial return but negative return in the long run.

Keywords: Underpricing, IPO, Indian Capital Markets, institutional investors, retail investors

JEL Classification: G14, G32