Valuation of IPOs in India-An Empirical study

Abstract

In this paper, we examine two main propositions for Indian Equity Market: (i) important factors that determine short-run underpricing of initial public offerings (IPOs) (ii) impact of IPOs " mispricing on investment banks " reputation. Data is employed for 432 new IPO issues for India from April, 2001 to December, 2011. We find that 5 variables i.e. number of times an IPO issue subscribed, number of uses of IPOs " proceeds, Listing Delay, Industry PE ratio and dummy for companies representing new economies are positively related to the short run initial return on IPOs, while 4 variables, i.e. company size , investors " sentiment , investment banks " reputation defined in terms of share in IPO proceeds and dummy for private companies " IPOs bear a negative relationship with initial return. The IPOs seems to be overpriced and the Indian market takes about 6 months to fully incorporate information for discovering the fair value of IPOs. Mispricing of IPOs seems to negatively impact the investment banks " reputation in the next period. Our results are in conformity with the previous findings of developed market. The findings of this research have strong implications for the policy makers, market intermediaries as well as investors. The present study contributes to the capital market literature, especially for emerging economies.