Indian Journal of Economics and Development

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Rationality Behind Short-Run Mispricing of IPOs in India


Affiliations
1 Indian Institute of Management Calcutta, India
2 Department of Economics, University of Burdwan, India
 

Objectives: The study examines the nature of pricing of IPOs in the Indian primary market over the last one and half decades (2000-01 to 2015-16). Further, we have tried to explain the rationality behind mispricing of IPOs in terms of general stock market movements. To be specific, the focus is on how does the prior general stock market behavior affects pricing of IPOs.

Methods: We have collected data through different sources, like, prime database, the official websites of BSE and NSE. For the purpose of evaluating the objectives of the study, ordinary least square (OLS) method is used to estimate parameters. In this context, two opposite situations of market (i.e., positive reactions and negative reactions) are used to predict the average return of IPOs. In addition, some descriptive statistical techniques of data analysis were also applied in our study to analyze data and draw conclusions.

Findings: It is seen that like the evidences of the developed market and other emerging markets IPOs are also underpriced in India. Like developed market in India also the book building method is gaining importance over the years. Interestingly, it is found that if market return reacts positively prior to issuance of IPOs average underpricing would be higher compared to the alternative situation. However, from the results of the estimated analysis, it is documented that general stock market movements do not have any significant role in explaining underpricing of IPOs in India.

Applications: From the estimated results of the study, it is apparent that underpricing of IPOs is persistent in India immediately after listing. Further, it is also appeared that unlike developed markets, in India prior stock market movements does not have any significant role in explaining underpricing phenomenon.


Keywords

IPOs, Book-Building, General Stock Market Movements, Global Economic Meltdown.
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  • Rationality Behind Short-Run Mispricing of IPOs in India

Abstract Views: 252  |  PDF Views: 154

Authors

Reshma Sinha Ray
Indian Institute of Management Calcutta, India
Arup Kumar Chattopadhyay
Department of Economics, University of Burdwan, India

Abstract


Objectives: The study examines the nature of pricing of IPOs in the Indian primary market over the last one and half decades (2000-01 to 2015-16). Further, we have tried to explain the rationality behind mispricing of IPOs in terms of general stock market movements. To be specific, the focus is on how does the prior general stock market behavior affects pricing of IPOs.

Methods: We have collected data through different sources, like, prime database, the official websites of BSE and NSE. For the purpose of evaluating the objectives of the study, ordinary least square (OLS) method is used to estimate parameters. In this context, two opposite situations of market (i.e., positive reactions and negative reactions) are used to predict the average return of IPOs. In addition, some descriptive statistical techniques of data analysis were also applied in our study to analyze data and draw conclusions.

Findings: It is seen that like the evidences of the developed market and other emerging markets IPOs are also underpriced in India. Like developed market in India also the book building method is gaining importance over the years. Interestingly, it is found that if market return reacts positively prior to issuance of IPOs average underpricing would be higher compared to the alternative situation. However, from the results of the estimated analysis, it is documented that general stock market movements do not have any significant role in explaining underpricing of IPOs in India.

Applications: From the estimated results of the study, it is apparent that underpricing of IPOs is persistent in India immediately after listing. Further, it is also appeared that unlike developed markets, in India prior stock market movements does not have any significant role in explaining underpricing phenomenon.


Keywords


IPOs, Book-Building, General Stock Market Movements, Global Economic Meltdown.

References