Open Access Subscription Access
Open Access Subscription Access
Relationship Between Management Quality Certification and IPO Underpricing:Evidence from India
The present study is an attempt to contribute to the extent literature on the Initial Public Offering (IPO) underpricing as it distinctively examines the relationship between the quality certifications used by issuers and the listing day returns of IPOs. The uniqueness of this study also lies in being one of the initial efforts to explore the quality certifications used by the issuers at the time of IPO in India. A sample period of 11 years, that is, 2004-2014, is examined. The average initial excess return (IPO underpricing) is observed at 21%. Taking a lead from the existing literature on IPO underpricing, various board-related, issue-related, and company-related variables were considered for an empirical analysis. It has been observed that the issue-related variables namely, issue size, listing delay, subscription ratio, and financial leverage, are significant. In addition, proxies used for management quality namely, professional associations of the board members, presence of female directors, and role duality, also significantly explain the IPO underpricing. These findings are consistent with Chemmanur and Paeglis (2005) and Reutzel and Belsito (2015).
Management Quality, Initial Public Offering (IPO), Underpricing, India.
- Agarwal, V., Taffler, R., & Brown, M. (2011). Is management quality value relevant? Journal of Business Finance and Accounting, 38(9-10), 1184-1208.
- Allen, F., & Faulhaber, G. R. (1989). Signalling by underpricing in the IPO market. Journal of Financial Economics, 23(2), 303-323.
- Baik, B. O. K., Farber, D. B., & Lee, S. S. (2011). CEO ability and management earnings forecasts. Contemporary Accounting Research, 28(5), 1645-1668.
- Baum, J. R., Locke, E. A., & Smith, K. G. (2001). A multidimensional model of venture growth. Academy of Management Journal, 44(2), 292-303.
- Beatty, R. P., & Ritter, J. R. (1986). Investment banking, reputation, and the underpricing of initial public offerings. Journal of Financial Economics, 15(1-2), 213-232.
- Beckman, C. M., & Burton, M. D. (2008). Founding the future: Path dependence in the evolution of top management teams from founding to IPO. Organization Science, 19(1), 3-24.
- Belghitar, Y., & Dixon, R. (2012). Do venture capitalists reduce underpricing and underperformance of IPOs?. Applied Financial Economics, 22(1), 33-44.
- Bushman, R., Chen, Q., Engel, E., & Smith, A. (2004). Financial accounting information, organizational complexity and corporate governance systems. Journal of Accounting and Economics, 37(2), 167-201.
- Carmen Diaz-Fernandez, M., Rosario GonzalezRodriguez, M., & Pawlak, M. (2014). Top management demographic characteristics and company performance. Industrial Management and Data Systems, 114(3), 365-386.
- Carter, R., & Manaster, S. (1990). Initial public offerings and underwriter reputation. The Journal of Finance, 45(4), 1045-1067.
- Cassia, L., Correale, A., & Minola, T. (2010). The role of Top Management Teams behind investors’ valuation of entrepreneurial IPOs. Investment Management and Financial Innovations, 7(2), 177-188.
- Certo, S. T. (2003). Influencing initial public offering investors with prestige: Signaling with board structures. Academy of Management Review, 28(3), 432-446.
- Certo, S. T., Covin, J. G., Daily, C. M., & Dalton, D. R. (2001). Wealth and the effects of founder management among IPO-stage new ventures. Strategic Management Journal, 22(6-7), 641-658.
- Certo, S. T., Holmes, R. M., & Holcomb, T. R. (2007). The influence of people on the performance of IPO firms. Business Horizons, 50(4), 271-276.
- Certo, S. T., & Hodge, F. (2007). Top management team prestige and organizational legitimacy: An examination of investor perceptions. Journal of Managerial Issues, 19(4), 461-477.
- Certo, S. T., Holcomb, T. R., & Holmes Jr, R. M. (2009). IPO research in management and entrepreneurship: Moving the agenda forward. Journal of Management, 35(6), 1340-1378.
- Chahine, S. (2004). Corporate governance and firm value for small and medium sized IPOs. Financial Markets and Portfolio Management, 18(2), 143-160.
- Chahine, S., Filatotchev, I., & Zahra, S. A. (2009). Building perceived quality of founder-involved IPO firms: Founder’s effects on board selection and stock market performance. Entrepreneurship Theory and Practice, 3(2), 319-335.
- Chemmanur, T. J. (1993). The pricing of initial public offerings: A dynamic model with information production. The Journal of Finance, 48(1), 285-304.
- Chemmanur, T. J., & Fulghieri, P. (1994). Investment bank reputation, information production, and financial intermediation. The Journal of Finance, 49(1), 57-79.
- Chemmanur, T. J., & Paeglis, I. (2005). Management quality, certification, and initial public offerings. Journal of Financial Economics, 76(2), 331-368.
- Chemmanur, T. J., Paeglis, I., & Simonyan, K. (2009). Management quality, financial and investment policies, and asymmetric information. Journal of Financial and Quantitative Analysis, 44(5), 1045-1079.
- Chen, J., & Yang, T. (2013). An empirical study of China’s second board. International Journal of Economics and Finance, 5(2), 35-45.
- Cohen, B. D., & Dean, T. J. (2005). Information asymmetry and investor valuation of ipos: Top management team legitimacy as a capital market signal. Strategic Management Journal, 26(7), 683-690.
- Connelly, B. L., Certo, S. T., Ireland, R. D., & Reutzel, C. R. (2011). Signaling theory: A review and assessment. Journal of Management, 37(1), 39-67.
- D’Aveni, R. A. (1990). Top managerial prestige and organizational bankruptcy. Organization Science, 1(2), 121-142.
- Fama, E. F., & Jensen, M.C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301-325.
- Filatotchev, I., & Bishop, K. (2002). Board composition, share ownership and ‘underpricing’ of UK IPO firms. Strategic Management Journal, 23(10), 941-955.
- Hall, R. (1993). A framework linking intangible resources and capabiliites to sustainable competitive advantage. Strategic Management Journal, 14(8), 607-618.
- Handa, R., & Singh, B. (2017). Performance of Indian IPOs: An empirical analysis. Global Business Review, 18(3), 734-749.
- Hearn, B. (2012). The contrasting effects of board composition and structure on IPO firm underpricing in a developing context. International Review of Financial Analysis, 21, 33-44.
- Higgins, M. C., & Gulati, R. (2003). Getting off to a good start: The effects of upper echelon affiliations on underwriter prestige. Organization Science, 14(3), 244-263.
- Ibbotson, R. G., & Jaffe, J. F. (1975). Hot issue markets. The Journal of Finance, 30(4), 1027-1042.
- Koh, F., & Walter, T. (1989). A direct test of Rock’s model and the pricing of unseasoned issue. Journal of Financial Economics, 23(2), 251-272.
- Leblanc, R., & Gillies, J. (2005). Inside the boardroom. Canada: John Wiley and Sons
- Lee, P. J., Taylor, S. L., & Walter, T. S. (1996). Australian IPO pricing in the short and long run. Journal of Banking and Finance, 20(7), 1189-1210.
- Lin, C. P., & Chuang, C. M. (2011). Principal-principal conflicts and IPO pricing in an emerging economy. Corporate Governance: An International Review, 19(6), 585-600.
- Loughran T., Ritter J. R., & Rydqvist K. (1994). Initial public offerings: International insights. Pacific-Basin Finance Journal, 2(2), 165-199.
- Loughran, T., & Ritter, J. R. (1995). The new issues puzzle. The Journal of Finance, 50(1), 23-51.
- Mak, Y. T., Tan, R. S. K., Tan, Y. C. W., & Tee, H. P. (2003). Corporate Governance and IPO Pricing (Vol. 5). Working Papers of Corporate Governance and Financial Reporting Centre. Retrieved from http://bschool. nus.edu. sg/CGFRC/Publications/WorkingPapers. aspx.
- Mcconaughy, D. L., Metthews, C. H., & Fialko, C. (2001). Founding family-controlled firms: Performance, risk and value. Journal of Small Business Management, 39(1), 31-49.
- Megginson, W. L., & Weiss, K. A. (1991). Venture capitalist certification in initial public offerings. The Journal of Finance, 46(3), 879-903.
- Mi Choi, H., Sul, W., & Kee Min, S. (2012). Foreign board membership and firm value in Korea. Management Decision, 50(2), 207-233.
- Rakhmayil, S., & Yuce, A. (2013). Executive qualification and firm value. Journal of Applied Business and Economics, 14(5), 52-70.
- Reutzel, C. R., & Belsito, C. A. (2015). Female directors and IPO underpricing in the US. International Journal of Gender and Entrepreneurship, 7(1), 27-44.
- Ritter, J. R. (1984). Signaling and the valuation of unseasoned new issues: A comment. The Journal of Finance, 39(4), 1231-1237.
- Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1-2), 187-212.
- Sahoo, S. (2014). The impact of corporate board structure on the pricing performance of initial public offerings. IUP Journal of Applied Finance, 20(4), 22-47.
- Welch, I. (1989). Seasoned offerings, imitation costs, and the underpricing of initial public offerings. The Journal of Finance, 44(2), 421-449.
- Welch, I. (1992). Sequential sales, learning, and cascades. The Journal of Finance, 47(2), 695-732.
- Welbourne, T. M., & Andrews, A. O. (1995). Predicting performance of initial public offering (IPO) firms: should human resource management (HRM) be in the equation?. CAHRS Working Paper Series, 192.
- Xu, Z., & Xu, L. (2012). IPO valuation of entrepreneurial firms in China’s new growth enterprise market: An examination of board composition, top manage ment team’s ownership and human capital. Journal of Chinese Entrepreneurship, 4(3), 206-220.
- Yu, T., & Tse, Y. K. (2006). An empirical examination of IPO underpricing in Chinese A-share market. China Economic Review, 17(4), 363-382.
- Zimmerman, M. A. (2008). The influence of top management team heterogeneity on the capital raised through an initial public offering. Entrepreneurship Theory and Practice, 32(3), 391-414.
Abstract Views: 0
PDF Views: 0