Received: 9 November 2019 Revised: 6 July 2020 Accepted: 6 July 2020

DOI: 10.1002/ijfe.2186

RESEARCH ARTICLE

Impact of information on winners' curse and long run

performance of initial public offerings

Sheena Chhabra | Ravi Kiran

School of Humanities and Social Sciences,

Thapar Institute of Engineering and
Abstract
Technology, Patiala, India The current research focuses on the short run and long run performance of ini-
tial public offerings (IPOs) during 2005–2012. The study evaluates the impact
Correspondence
Sheena Chhabra, School of Humanities of informational variables (both internal and external) on the first day returns.
and Social Sciences, Thapar Institute of The performances have been measured through market adjusted excess return
Engineering and Technology, Patiala,
(MAER) and buy and hold abnormal returns (BHAR). A structural equation
India.
Email: [email protected] model (SEM) has been designed to identify how information affects the short
run performance of IPOs. The results reveal that new issues are underpriced
thereby proving winners' curse hypothesis. The study highlights that the infor-
mational variables have a significant effect on first day returns. The results also
indicate that the average long run returns are negative. The results of this
study will assist global investors in decision making and will facilitate active
participation of these investors in IPOs in emerging markets like India.

Key Highlights
1. Most of the IPOs during 2005–2012 prove winners' curse thereby can be
considered as underpriced.
2. The informational variables like size of firm, age of the firm, issue size,
underwriters' reputation etc. have an impact on the listing day returns.
3. The findings suggest that the returns during pre- and post-recession period
are not same indicating that timings of the offer influence the performance
of new issues.

KEYWORDS
external factors, initial public offerings, internal factors, performance, recession, winners' curse

1 | INTRODUCTION associated with the company and the external factors are
the factors associated with the outer world. The theoreti-
Stock market can be volatile and the reasons for abnor- cal as well as pragmatic interest in information asymme-
mal rise and fall are difficult to identify but there are cer- try suggests empirical research on the current subject.
tain factors that affect the stock prices. It has been The available research studies provide evidence that the
observed that low-priced stocks issued by the firms are unusual listing day returns of initial public offerings
highly volatile in nature (Fernandez, Abascal, & (IPOs) are allied to proxies for asymmetric information.
Rahnema, 1993). This volatility can be due to opacity of The Signaling theory (Allen & Faulhaber, 1989), asym-
information with respect to various internal and external metric information (Ritter & Welch, 2002), offer size
factors. The internal factors are the set of factors directly (Megginson & Weiss, 1991), age of the firm and time of

Int J Fin Econ. 2022;27:975–992. wileyonlinelibrary.com/journal/ijfe © 2020 John Wiley & Sons Ltd 975
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976 CHHABRA AND KIRAN

issuance (Ritter, 1991), ownership concentration also been found that age is an indicator of accessibility to
(Connelly, Limpaphayom, & Siraprapasiri, 2004) are con- information (Ritter, 1991). During the offering process,
sidered as the determinants for the performance of IPOs. the underwriter plays a significant role in determining
The present study considers internal factors like size of the price (offer price) and quantity for IPO. Since the par-
the firm, age of the company; issue size and post pro- ticipation of both informed as well as uninformed inves-
moters' stake/organizational structure. The various exter- tors is required for the success of an IPO. The price of the
nal factors studied in the current research are IPO issue is decided in such a manner that it leads to winner's
grading, underwriters' reputation and timings of the curse for uninformed investors (Rock, 1986) and is bene-
offering. ficial to the informed investors. Michaely and Shaw (1994)
The previous studies have focussed on the impact of emphasised that the extent of underpricing is aggravated
individual factors on the short run performance of IPOs. when more informed investors participate in the issue.
The evidence for the effect of information in the form of The informed investors utilize the available information
internal and external factors is inadequate. Therefore, the during the offering process and do not participate in
present study attempts to understand how information after-market (Pandey, 2005). It is found that the timings
(in the form of various internal and external variables) of the offering affect the first day returns. Lucas and
affects the listing day returns. The information is easily McDonald (1990) opined that most of the firms prefer to
available and assessable in this technical advanced envi- go public during hot period as the issue could be under-
ronment and this information affects performance of valued in cold period. Hot Period is defined by periods of
IPOs to a greater extent. It is found that the industry with rising initial returns and increasing numbers of IPOs,
less informative history experience more underpricing whereas Cold Period is the time when there is less under-
because of uncertainty about the issuer (Karlis, 2000). pricing, lower issuance, fewer instances of oversubscrip-
The Indian market takes about 6 months to fully absorb tion, and larger offerings. Neneh and Smit (2013)
the information and reach the true value of the stock highlighted that the issues offered during hot period are
(Sehgal & Sinha, 2013). It is required to analyse the role underpriced than the issues in cold period. Another cru-
of information in measuring the short run performance cial factor that influence the performance is IPO grading
of new issues. In the modern era, the information is as it indicates the fundamentals of the company. IPO
shared through various web portals. Thus, it is warranted grading conveys information related to firm fundamen-
for the investors to be acquainted with the role of infor- tals and not issue price and results in lower underpricing
mation in the performance of stocks which affects their (Deb & Marisetty, 2010).
investment decisions. The paper also compares the per- The Indian primary market experiences information
formance of IPOs in two different time horizons (pre- asymmetry. Keeping in view, the importance of informa-
and post-recession). tion as pointed by different researchers for gauging the
The emerging market passes through several phases performance of listing day returns, the present research
during their emergence and integration with other mar- has been undertaken with the objective to identify the
kets thereby leading to a change in the number of IPOs extent of underpricing through various informational
(Goetzmann & Jorion, 1999). Dorn (2009) found that size variables. These factors include size of the firm, age of
of the firm is one of the determining factors of listing day the firm, issue size; post promoters' stake/sale of pro-
returns. Campos, De la Fuente, Silva, and moters' stake in the offer, IPO grading, underwriters' rep-
Cademartori (2015) highlighted that the size of the firm utation and timings of the offer.
affects information asymmetry. Since larger companies
have more resources to build up stronger corporate gov-
ernance structures and disclose more information, which 1.1 | Size of the firm
in turn reduces information asymmetry. Additionally,
issue size plays a significant role in influencing the first The size of the firm is considered to be a substantial fac-
day returns (Michaely & Shaw, 1994). Empirically, the tor that influences the performance of the stocks. The
structure of the organisation has a significant impact on size of the firm can be measured through its total assets.
the performance of stocks. The restructuring of the com- The more the assets, larger is the size.
pany takes place during new issue and the sale of
insider's stake during new offerings can act as a signal in
judging the future performance of the firm (Leland & 1.2 | Age of the company
Pyle, 1977). The insiders' stake conveys information
about the expected cash inflows of the firm indicating Age is the time period from the date of inception till the
higher shareholding means high value of the firm. It has time firm release its IPO. Usually, age is an indicator of
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
CHHABRA AND KIRAN 977

accessibility to information but in Spain, the availability 1.7 | Timings of the offer
of information is determined by management attitude.
Hence, company's age has no specific relation with The prevailing market conditions influence the listing
returns for Spanish IPOs (Fernandez et al., 1993). day returns to a greater extent. When the market is
jaunty, the investors are willing to invest in the upcoming
issues which lead to increase in the demand for the issue.
1.3 | Issue size Since the number of shares is limited and the demand is
not fully met during the offer thus the some investors
The size of the issue signifies the total amount raised by may buy the shares at premium on the listing day. It is
the IPO. The size of an issue basically indicates whether observed that during the internet bubble period from
the new issue is successful or not. year 1999–2000 which is considered as hot period, the
extent of underpricing is highest (Wang & Wilkins, 2007).

1.4 | Promoters' stake/organizational

structure 2 | R E V I E W O F L I T E R A T U R E AN D
HYPOTHESES DEVELOPMENT
Promoters' stake conveys the intrinsic worth of the
firm as it is the fraction of shares held by the insiders 2.1 | Short run performance of IPOs and
after the new issue. The promoters include individuals, Winner's curse theory
financial institutions, corporate bodies, and so
on. Organizational structure changes with the sale of Price performance of new offerings has gathered the
promoters' stake. attention of many researchers across the globe during the
last few decades because of their abnormal listing day
returns. Indian stock market has gained momentum after
1.5 | IPO grading the adoption of new economic policy resting on the three
plans of liberalization, globalization and privatization.
To overcome the problem of information asymmetry, The Indian primary market has undergone many
SEBI made IPO grading mandatory from May 1, 2007 changes which have led to improved transparency and
and to help retail investors in investment decisions. efficiency. A sizable body of prior research support that
IPO grading acts as a proxy for the quality of an issuer the IPOs are usually underpriced leaving higher immedi-
and is regarded as an additional certification of the ate returns. It is evident that the initial returns are posi-
IPO fundamentals. IPO grading gauges the fundamen- tive on IPOs across 38 countries (Loughran, Ritter, &
tals of company issuing the stocks on a five-point scale, Rydqvist, 1994). The average first day return of 6,391
a higher score indicating strong fundamentals. The IPOs during 1980–2003 is 18.7% (Loughran &
information asymmetry between informed and Ritter, 2004). The study of 53 IPOs in Egypt reveals that
uninformed investors can be reduced through IPO most of the IPOs provide positive immediate returns
grading and it improves the market efficiencies (Omran, 2005). It is observed that 80% of the new issues
thereby reducing the extent of underpricing. The in India have been traded at a discount during 2011
stocks with high grades experience a lower degree of (Global IPO trends, 2012). The average listing day returns
underpricing (Poudyal, 2008). for 510 stocks offered during 1982–1983 in US are 9.87%
and their average returns on day 21 are 12.95% (Miller &
Reilly, 1987). It is highlighted that the average IPO
1.6 | Underwriter's reputation underpricing of the new stocks in the Hong Kong Growth
Enterprise Market (HKGEM) is17.78% (Deng, Bai,
The value of underwriter's reputation does not depend Zeng, & Holscher, 2010). An initial underpricing of
on its activity in the IPO market but on the series of 39.87% has been found in Pakistan while considering
activities it is associated with. The bigger the under- 59 IPOs issued between 2000 and 2011(Kayani &
writer, the more rigorous are the consequences of loss Amjad, 2011). The average abnormal returns of
of reputation. The underwriter's reputation can be Australian IPOs during 2006–2011 are 25.47% (Liu &
measured by the share of an underwriter in terms of Ritter, 2010). While analysing the new issues in Malaysia
capital during the reference period; or the share in IPO during 2000–2008, Yazdani and Aris (2015) report that
business in terms of number of issues they are the average market adjusted returns are 9.4%. Bou-
associated with. lanouar and Alqahtani (2016) examine the cooperative
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978 CHHABRA AND KIRAN

insurance sector in the Saudi Arabian market and high- provided negative returns in the next 3 years, but per-
light that the underpricing not only exists but, is among formed well in last (fifth) year. The maximum returns of
the highest in the world (455%). Eyssell and 42.49% are fetched during the 34th month (Ritter, 1991).
Kummer (1993) opine that there exists a signaling mech- Fernandez et al. (1993) highlighted that during early days
anism where firms send signals about their performance of trading, the new issues in Spain fetched higher returns
to the market by underpricing their IPOs. to investors, but these excess returns tend to fade away as
In Indian context, a study by Madan (2003) supports more information becomes available. During 1975–1992,
the view point. The study reports that during 1989–1995, the average returns of −44.2% are generated after 3 years
85.6% IPOs (1,368 out of 1,597) are underpriced. The of listing in US market (Brav, Geczy & Gompers, 2000).
average underpricing during 2001–2005 is 46.63% signify- Alvarez and González (2001) examine the long run perfor-
ing that the issues leave huge money on the table for the mance of Spanish new issues during 1987–1997 and find
investors (Sharma & Seraphim, 2010). The extent of that they underperform in long run. The first day trading
underpricing is 46.55% for issues during 2002–2006 and returns in Germany are 56.53%, whereas daily returns for
these positive returns tend to disappear with the absorp- the next 9 days are not significant and underpricing is con-
tion of information in the market (Sahoo & Rajib, 2010) sidered to have disappeared. But after 1 year, the returns
whereas Shah (1995) reports that IPOs offered in early are more than 100% and financial risk is minimal
90s provide average positive returns even after listing. (Burrowes, Feldmann, Feldmann, & MacDonald, 2004).
But, Pandey (2005) reveals that the average positive Kumar (2007) observe that IPOs beat the market after
returns tend to fade after first year of listing. Shah and 3 years of listing and provide average returns of −14.69%.
Mehta (2015) observe that the average returns are 7.19% The results are consistent in developing countries like
on the listing day for the IPOs offered during 2010 to Pakistan and India (Sahoo & Rajib, 2010; Sohail &
2014. There are variations in the results, probably due to Raheman, 2009). Ritter (2016) find that the average 3-year
the difference in the time periods of studies. Buy and Hold average returns (market adjusted) for new
The current study considers that most of the issues issues during 1980–2014 is −17.8%. Hence the proposed
are underpriced which is based winner's curse hypothesis hypothesis is:
(Rock, 1986). The investors are either informed or H1b: The average 3 year returns (Buy and Hold abnor-
uninformed. Uninformed investors subscribe to every mal returns, BAHR) are negative for Indian issues during
IPO, but informed investors subscribe to new shares, only 2005–2012.
if the offer price is less than the fair value. This results in Now, a question that arises is if IPOs why their price
a winner's curse for investors who are uninformed. is fixed on a lower side or why are they underpriced? The
Hence, shares must be offered at a discount to capture probable reasons could be the information risk, that is,
the former group. None of the investor group has enough no previous information about the value of stock is avail-
money to absorb the entire IPO. Thus, both the categories able with the investors. According to Ibbotson (1975),
of investors are necessary for the success of an IPO. Based most of the IPOs are offered at a discount because of
upon above literature in the present study, the following information asymmetry and rationing is done to attract
hypothesis is proposed: uninformed investors. Hence, issuers are ready to offer a
H1a: The study considers that the winners' curse is true discount so as to distribute the risk. The price updating
for Indian IPOs during 2005–2012. requires adequate information which is spread in the
long run. It is evident from various studies that new offer-
ings perform well during the first year of listing and after
2.2 | Long run performance of new that the performance deteriorates. Further to study the
issues across nations price performance in detail, introspection is needed on
variables of information that affect the IPO performance.
As evidenced through literature, many of the studies
have been conducted in developed countries, and there is
a possibility that the Indian market may perform in a 2.3 | Factors influencing short run
similar manner as mature markets because of similar performance of IPOs
characteristics. To understand this, an attempt has been
made to analyse the long run (3 years) performance of The size of the firm is an important and pertinent factor
Indian primary market. The after-market performance that affects the performance of the stocks by providing
(long run performance) of IPOs varies over time. information about the company's assets. Studies reveal
Ibbotson's (1975) study in Ritter (1991) revealed that in a that there is an inverse relation between size of firm and
period of 5 years, IPOs usually outperformed in first year, extent of underpricing. It is examined that irrespective of
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CHHABRA AND KIRAN 979

the Venture Capitalist (VC) backed and non-VC backed, Khanna, 2012). But, Shah (1995) finds that high initial
the firm with larger size has low deliberated underpricing returns are obtained for both very small and very large
(Francis & Hasan, 1999). Lizi nska and Czapiewski (2014) issues whereas Madan (2003) highlights that the issue
find that size of the company (pre-issue) affects the size of less than 1 crore can give listing day returns as
degree of underpricing leading to higher returns for small high as 226.1% and as low as 36.4% when the issue size is
companies. Singh and Vishwanath (2013) also observe above 50 crores in India. The results are not consistent
that there is a negative association of 18.6% between over certain time duration. Thus, this need to be exam-
underpricing and firm size. It is evident in German mar- ined in Indian economy during pre- and post-recession
ket that underpricing has a negative association with the period and the proposed hypothesis is:
firm size (Dorn, 2009). On the contrary, Fernandez H3: The issue size has an impact on the level of
et al. (1993) reflect that there is no significant difference underpricing.
in the initial returns and after market returns for a large Another key informational variable that influences
sized firm. The small issues give high initial returns but the first day returns is age of the firm. There is rich litera-
underperform in long run. Such a tendency is due to ture supporting that age of the firm is directly associated
overreaction hypothesis (Ritter, 1991). In Indian context, to long run returns of the firm and can be considered as a
a significant negative association of 4.79% is found proxy for the quality of the issuer (Gleason et al., 2008;
between company's size and underpricing at 20% and Pandey, 2005; Ritter, 1984). Ritter (1991) opine that in
below level (Sehgal & Sinha, 2013). case of matching firms, the mature firms which were
As discussed above, many researchers accept that size established earlier provide higher returns in the long run.
of the firm affects the performance of IPO. Thus, the cur- Bradley et al. (2009) reveal that age of the firm has a neg-
rent study will make an attempt to identify the effect of ative association with underpricing. Engelen and
firm size as a part of information on IPO performance in Essen (2010) highlighted that there is an inverse relation
India and the proposed hypothesis is: between age of the firm and the initial returns. In Korea
H2: Size of the firm influences the extent of Exchange, mature companies perform better in long run
underpricing. and underpricing is low for the firms with age more than
Another significant variable of information is the size 30 years (Yue, 2012). Usually, age is an indicator of acces-
of the issue. Michaely and Shaw (1994) highlight that the sibility to information, but in Spain, the availability of
larger issues usually underperform in long run and are information was determined by management attitude.
underpriced to a greater extent. While analysing the per- Thus for Spanish IPOs, age of the issuer had no specific
formance of blue chip companies in listed on the Baltic relation with returns (Fernandez et al., 1993). On the
Stock exchanges, Bistrova, Lace, and Peleckienė (2011) contrary, Guner, Onder, and Rhoades (2000) indicating
find that there is a positive association between stock per- age is positively associated with the degree of under-
formance and sufficiency of equity capital indicating that pricing. In Indian market, the results are bizarre. It is
stocks perform well if the capital raised is more. The ini- found that during April 2000 to December 2011, there is
tial returns are high in Spain and Israel when the volume no significant relation between firm's age and level of
of IPOs is large (Amihud, Hauser, & Kirsh, 2003; underpricing Bansal and Khanna (2012). Similar evi-
Fernandez et al., 1993). Gleason, Johnston, and dences are provided by Ghosh (2005), Deb and Mar-
Madura (2008) support the results indicating larger isetty (2010) and Jain and Padmavathi (2012) indicating
the size of an IPO or more the capital raised; more is the that the Indian investors do not form their opinion
uncertainty about after market valuation decelerating the according to the age of firm. Leong and Sun-
long run performance. On the contrary, Sohail and darasen (2015) reported that age of the firm has no influ-
Raheman (2009) find an inverse relationship between ence on the listing day returns. The association between
underpricing and the offer size. Consistent results have age of the firm (being a part of information) and under-
been found in developed markets where underpricing is pricing is far from being settled and is open for debate.
negatively related to issue size (Bradley, Gonas, Thus, the current study tries to evaluate the performance
Highfield, & Roskelley, 2009). Ivanauskas (2015) studies of new issues depending upon the age of the firm as it is
a negative relation between underpricing and IPO pro- an interesting factor in underpricing which needs a
ceeds in Nasdaq OMX Baltic equity market. Sochi and deeper analysis. Hence, the proposed hypothesis is:
Islam (2018) reported that the offer size has a substantial H4: The age of the firm affects the listing day returns.
positive influence on the extent of underpricing. In Other aspect of the information is the promoters'
Indian market, a significant positive association has been stake. The restructuring of the company during new issue
found between capital raised and the level of under- and the sale of promoter's stake can act as a signal in
pricing during April 2000 to December 2011(Bansal & judging the future performance of the firm (Leland &
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980 CHHABRA AND KIRAN

Pyle, 1977). The insiders' stake conveys information the lemon problem, there is a need for information inter-
about expected cash inflows of the firm indicating higher mediaries like rating agencies to uncover the superior
shareholding means high value of the firm. There is an information (Healy & Palepu, 2001). The information or
inverse relationship between the first day returns and the “lemons” problem occurs due to information asymmetry
portion of insiders' stake in offerings with a correlation and conflicting incentives between issuer and the inves-
coefficient of −0.15 (Eyssell & Kummer, 1993) indicating tors. The mandatory IPO grading has reduced the ex-ante
that the first day market adjusted returns for the firms uncertainty in Indian new issue market which leads to
with high initial insiders sale are −9.52% and the firms low underpricing (Bansal & Khanna, 2013). On the con-
which do not sell their stake during offerings obtain trary, Baluja (2013) specify that higher positive returns
excess returns of 10.28% indicating that issues with are obtained on the listing day indicating that IPO grad-
higher initial insiders' sale are less underpriced. The aver- ing does not reduce information asymmetry. While ana-
age underpricing for IPOs in Spain through private offer- lysing the IPOs during 2007–2014, Nityasundar and
ings (where shares are allotted to a group of investors or Kumar (2016) highlight a negative association between
a single investor) is observed to be more than for public the first day returns and the IPO grade. A positive rela-
offerings (Fernandez et al., 1993). There is a positive asso- tionship is determined between demand of retail inves-
ciation between underpricing and the diffused ownership tors and IPO grades but the coefficient of grading is
as increased dispersion increases the stock liquidity and greater in the case of the institutional investors. Also, the
reduces firm's cost of capital (Amihud et al., 2003; extent of underpricing is more in graded IPOs than in
Michaely & Shaw, 1994). It is found that the Thai IPOs non-graded IPOs but the value is insignificant which sug-
underperform after listing if the ownership concentration gests that grading has no significant influence on the
is high (Connelly et al., 2004). Mroczkowski and pricing of IPOs (Jacoby & Agarwalla, 2012; Singla, 2012).
Tanewski (2007) opine that the amount of capital Hence, it is necessary to identify the effect of IPO grading
retained by the owners acts as a signal for the potential as a component of information on the first day returns.
investors about the true value of the firm which reduces Therefore, the proposed hypothesis is:
the degree of underpricing. It is observed that the inves- H6: IPO grading has an influence on the extent of
tors are keenly interested in the companies where major- underpricing.
ity stake is retained by the owners (Merikas, The other key dimension for information is reputa-
Gounopoulos, & Nounis, 2009). Martı´nez et al. (2010) tion of the underwriter, which has an impact on the
highlight that the privatization boosts the corporate after-market risk in short and long run (Gleason
entrepreneurship as new owners are associated with the et al., 2008). Yip, Su, and Ang (2009) highlighted that
firm and hence this necessitates more pioneering and short run abnormal returns and the negative long run
proactive behaviour. This progression in entrepreneur- returns are highly anticipated by the companies which
ship may augment the performance of the stocks of that are associated with reputed underwriters. It is reiterated
company. For Indian primary market, the insider's stake by Guner et al. (2000) that the underwriters well known
acts as a positive indicator for the after market perfor- to investors underprice their issues to a lesser extent.
mance of IPOs in fixed price issues in India (Pandey & Michaely and Shaw (1994) observed that the issues man-
Kumar, 2001). It is argued that the promoters' stake influ- aged by reputed underwriters experience less under-
ence the short run performance of new issues. pricing than issues associated with less reputed and the
A bizarre result is highlighted by Deb and Mar- respective returns are 4.5% and 10.9%. In the long run,
isetty (2010), Jain and Padmavathi (2012), Rani (2014), new issues perform better than those with less reputed
and Venkatesh and Neupane (2005), indicating that there ones with returns −1.52% and − 26.8%, respectively. Fur-
is no significant association between underpricing and thermore, Logue (1973) observed that underwriters' repu-
insiders' stake. Hence it needs further investigation and tation influence the first day returns. The new offerings
the following hypothesis is proposed: associated with reputed underwriters sends positive sig-
H5: The sale of promoters' stake during the offering has nals to the market about their lower magnitude of risk
an impact on first day returns. thereby decreasing the extent of underpricing. Also,
The IPO grade represents the fundamentals of a com- Sharma and Seraphim (2010) highlighted an inverse asso-
pany, thus IPO grading is an important variable to study ciation between underwriters' prestige and underpricing.
which has an impact on the after market performance. A This indicates that reputed underwriters are associated
higher IPO grade indicates that the firm is fundamentally with IPOs which experience low underpricing. Sehgal
stronger than the lower grade which reduces the uncer- and Sinha (2013) covering Indian market also confirmed
tainty level and a better long run performance can be negative association of 1.18% between underwriters' repu-
obtained by the stocks. It is suggested that to overcome tation and level of underpricing at 20% significant level
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CHHABRA AND KIRAN 981

TABLE 1 Summary of the testable hypotheses

S. No. Hypotheses Supporting studies

H1a: The study considers that the winners' curse is true for Indian IPOs during Rock (1986)
H1b: 2005–2012. Brav, Geczy & Gompers (2000)
The average 3 year returns (Buy and Hold abnormal returns, BAHR) are
negative for Indian issues during 2005–2012.
H2: Size of the firm influences the extent of underpricing. Francis and Hasan (1999)
H 3: The size of the issue has an impact on the extent of underpricing. Michaely and Shaw (1994); Bistrova et al. (2011)
H 4: The age of the firm has an impact on the listing day returns. Ritter (1984); Pandey (2005); Gleason et al. (2008);
Bradley et al. (2009)
H 5: The sale of promoters' stake during the issue affects the first day returns. Leland and Pyle (1977); Eyssell and
Kummer (1993)
H 6: IPO grading affects the level of underpricing. Bansal and Khanna (2013)
H 7: Reputation of the underwriters affects the first day performance of Logue (1973); Michaely and Shaw (1994); Wang
offerings. and Wilkins (2007); Bradley et al., 2009)
H 8: Timings of the offer affect the first day returns. Merikas et al. (2009); Mahmood et al. (2011);
Sadaqat et al. (2011)

for the issues offered during April 2001 to December market, a large number of companies float their stocks in
2011. Contrary to these results, it was found that the top the market as their placement in stock exchange is easier
quality underwriters bring most of the IPOs in the mar- and failure risk is minimal which results in under-pric-
ket, which are large in size and are highly underpriced ing, but in the long run the value of stock decreases due
(Bradley et al., 2009; Wang & Wilkins, 2007). Rock (1986) to over-optimism and the stock underperforms. But
concluded that underwriters deliberately support new incongruous results are observed in Chinese market
offerings in order to avoid their failure, but the perfor- where the extent of underpricing is small during
mance declines with the passage of time and a logical favourable market conditions (Su, 2004). In Indian pri-
consequence is that if the pricing is not accurate then this mary market, diverse results have been found which gen-
could be reflected by decline in underwriters' market erate a curiosity to study the effect of market condition
share. Thus, through literature it is difficult to determine on new issue. Therefore, the current research will con-
a priori impact of underwriter reputation (as an impor- sider the IPOs during 2005–2012 which include the reces-
tant constituent of information) on IPO performance but sionary period and tries to study the impact of timing of
has definitely generated the interest that this needs to be the offerings on their performance (Table 1). Thus, the
examined. Hence, the proposed hypothesis is: proposed hypothesis for testing is:
H7: Underwriters' reputation affects the first day perfor- H8: Timings of the offer affects the first day returns.
mance of offerings.
The stock performance also depends upon the preva-
iling market conditions. It is analysed that the short run 3 | R E S E A R C H M E T H O DO L O G Y
performance of new issues in China during Asian finan-
cial crisis (1997–1998) and global economic crisis Thus, it can be inferred as examined above that through
(2007–2009) and found that there is 10% increase in the a vast majority of literature is available regarding the per-
average underpricing during global economic crisis formance of Indian IPOs, but a few researchers have con-
(Mahmood, Xia, Ali, Usman, & Shahid, 2011). It is exam- sidered the availability of information in their research.
ined that the effect of market conditions and the results The availability of information affects the investor's deci-
highlight that when the conditions are favourable in the sion regarding new issue; therefore, the current study has
economy, the extent of underpricing is greater. The aver- considered various informational variables (size of the
age initial return is 26.71% for 143 global shipping IPOs company, issue size, age of the firm, post promoter's
when listed during hot period, whereas if listed during stake, IPO grading, underwriters' reputation and timings
cold period, the average initial return is only 7.75% of the offer) that help the investors to make the decision
(Merikas et al., 2009). Sadaqat, Akhtar, and Ali (2011) before investing in an IPO. The research sample involves
also supported that IPOs provide high market adjusted the IPOs (using book building mechanism) which are
return of 95.6% during boom in the economy. In bullish listed on NSE during 2005–2012. The year 2008 is
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
982 CHHABRA AND KIRAN

TABLE 2 Summary of GDP Growth during 2005–2012 MAER: Market adjusted excess return.
The long run performance (3 year holding period
S. No Year GDP growth (%)
return) is measured utilizing the buy and hold abnormal
1 2005 9.3
returns (BHAR)
2 2006 9.3
3 2007 9.8 BHAR = Σ ð1 + Rit Þ – Σ ð1 + Rmt Þ: ð2Þ
4 2008 3.9
5 2009 8.5 where Rit is return on firm in month t and Rmt is return
on benchmark in month t.
6 2010 10.3
BHAR indicates whether the first day excess returns
7 2011 6.6
are extended to the late buyers or disappears on the list-
8 2012 4.7 ing day (Sahoo & Rajib, 2010).
Source: World Bank, 2015. For long time horizons, BHAR seems to be conceptu-
ally better than cumulative average return (CAR) as it
measures investors experience precisely (Barber & Lyons,
considered as the recession period because the statistics 1997; Lyons et al., 1999; Ritter, 1991).
regarding the GDP growth provided by World Bank sup-
port this assumption (Table 2).
This period covers two important time durations of 3.1 | Measurement for internal factors
Indian economy (pre-recession and post-recession). The
duration between 2005 and 2008 is considered as pre- The size of the firm is measured in terms of its total assets
recession period and the duration from 2009 to 2012 is (Daley, 1984; Foster, 1977; Lougee & Marquardt, 2004). In
considered as post-recession period. the current study, size of the firm is determined by total
Figure 1 provides the GDP of India during 2006 to 2016 assets in Rupees crore. The size of the issue is evaluated by
which clearly indicates that there was a fall in the GDP total IPO proceeds (Levis & Vismara, 2013). The study uti-
from 2006 to 2007. Figure 2 provides evidence that the GDP lizes total amount (in Rs.) raised by the issue as a measure
growth during 2008–2009 was below 4%, which shows a for size of an issue/offer.
slowdown in the Indian economy. While analysing the per-
formance of IPOs in different states of economy offered dur-
Supportive
ing 2000 to 2009, Sadaqat et al. (2011) have also considered
Factor Measurement literature
May 2008 to April 2009 as the recession period.
Size of the firm Total assets in rupee Lougee and
In total, there are 402 new offerings during 2005–2012.
crore Marquardt (2004)
Some of them are follow-on-offerings (FPO); few are not
listed on NSE now and for some the data is not available, Issue size Total capital raised Levis and
in rupees Vismara (2013)
thus the final sample size is 300 IPOs. The details regard-
ing offer price, listing price, listing date, market indices, Age of the firm Difference in the
year of inception
and so on, have been collected from website viz. http://
and year of
www.chittorgarh.com, http://www.nseindia.com, http://
offerings
www.moneycontrol.com. The details of informational vari-
Post promoter's Difference of Copeland and
ables have been collected from Prowess database.
stake/ promoters' stake Galai (1983)
The study utilizes market adjusted excess return organizational before and after
(MAER) to measure first day returns/underpricing and structure the issue
MAER is calculated using the following equation (Eyssell &
Kummer, 1993; Merikas et al., 2009; Ritter, 1991)
The age is measured by the difference in the year of
MAER = ½ðP1 − P0 Þ=P0 – ðM1 − M0 Þ=M0 *100 ð1Þ offering and the year of inception. The promoters' owner-
ship concentration is defined as the proportion of shares
P0: Offer Price. legally owned by promoters (Copeland & Galai, 1983).
P1: Closing Price on the first day of trading. The post promoter stake is measured on the basis of per-
M0: Closing Value of Market Index on the Offer centage of stake retained by the promoters after the issue.
Closing date. The present study identifies the impact of percentage of
M1: Closing Value of Market Index on the first day of stake sold (difference of promoters' stake before and after
trading. the issue) by the promoters on the first day returns.
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
CHHABRA AND KIRAN 983

F I G U R E 1 GDP of India (2006 to 2015) (Source: https://www.macrotrends.net/countries/IND/india/gdp-gross-domestic-product)

[Colour figure can be viewed at wileyonlinelibrary.com]

F I G U R E 2 GDP Growth (1980–2014) (Source: https://www.macrotrends.net/countries/IND/india/gdp-growth-rate) [Colour figure can

be viewed at wileyonlinelibrary.com]

3.2 | Measurement for external factors ranks of all the underwriters associated with the new
issue.
IPO grading has been mandatory by SEBI after May
2007, hence the graded issues are rated as 1 and the Supportive
non-graded issues are rated as 0. Hence, a dummy vari- Factor Measurement literature
able has been used as a proxy for the IPO grading. The IPO grading Dummy variable is
number of issues during the sample period an under- used for IPO
writer is associated with is the reflection of its reputa- grading.
tion (Guner et al., 2000; Lee, 2011). The underwriter 1: Graded IPOs; 0: Non
associated with a highest number of issues is ranked graded IPOs
1. In case, the IPO has more than one underwriter, the
final rank is calculated by considering the average of (Continues)
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
984 CHHABRA AND KIRAN

during 2011 when the market has pressure of both reces-

Supportive
sion and inflation. The results allow us to accept H1a as
Factor Measurement literature
they support the winners' curse theory (first day adjusted
Underwriters' It is measured through Guner et al. (2000);
returns are positive in short run). The results are in support
reputation / the number of issues Lee, Chen, Li,
to studies conducted abroad. Instefjord, Coakley, and
rank an underwriter is and
associated with. Chang (2011) Shen (2005) find that 884 IPOs in China during 1993–2003
support winners' curse hypothesis. The first day return in
Timings of Dummy variable is
the offer used for two
UK during 1993 to 2001 ranges from 3% to 65% and an aver-
different time age return of 108.33% has been obtained in South Africa
horizons. during 2006–2010 (Heerden & Alagidede, 2012; Unlu,
Duration from Ferris, & Noronha, 2004). Since the average return for
2005–2008 (pre- the sample of 300 new issues in the current study is posi-
recession): 1 tive (18.03%), thus it can be said that most of the issues
Duration from
during 2005–2012 are underpriced.
2009–2012 (post-
While evaluating the performance of new issues in
recession): 0
two time horizons, it has been found that the number of
issues offered in the pre-recession period (2005–2008) are
A dummy variable has been used as a proxy for the 188 and 112 IPOs are offered during the post-recession
timings of the offer. The issues offered during 2005–2008 period. In Table 4, the statistics of new offerings during
(pre-recession period) are assigned 1 and the issues pre- and post-recession period are shown. The average
offered during 2009–2012 (post-recession period) are returns for pre- and post-recession period are 24.34% and
assigned 0. 7.45% respectively indicating that the market has not
The characteristics of key informational variables gained much momentum during 2009–2012 as it had in
have been measured by their mean values and standard the pre-recession period.
deviation. To analyse the relationship between first day The results also reveal that the first day returns are as
returns and informational variables, Structured high as 274.97% and as low as −79.59%. The highest posi-
Equation Modelling (SEM) has been applied. The stan- tive returns are obtained in 2005, when the market was
dardization of all the variables has been done by calculat- hot and the highest negative returns were obtained dur-
ing the z scores for each variable prior to the analysis as ing 2011 when the market was cold.
these informational variables are on different scales. For To further compare the short run returns for two
instance, the z score for issue size is calculated as issue phases (pre-recession and post-recession); a test of signifi-
size-mean[issue size]/std dev[issue size]. Similarly, the z cance, z-test is applied. The results show (Table 5) that
score for each variable has been calculated. the calculated z-value is higher than z-table value indicat-
A z-test has been applied to compare the short run ing that in the returns of IPO during two time periods are
and long run returns during pre-recession (2005–2008) different at 5% significance level.
and post-recession (2009–2012) period. Since the study is conducted on IPOs offered during
2005–2012 which includes the recessionary period (2008).
Therefore, an attempt is also made to analyse the impact
4 | E M P I R I C A L RE S U L T S of timings of the offer on the first day returns. The results
highlight that the time period plays a significant role in
The results as highlighted through Table 3 depict that the short run performance of IPOs and the results are sig-
extent of underpricing for 300 IPOs during 2005–2012 is nificant even at 1% significance level. The earlier
18.03% calculated by Equation (1) (Chhabra, Kiran, & researches have examined the after-market effects of inte-
Sah, 2017). The first day return is as high as 274.97% and gration of global capital market on various primary mar-
as low as −79.59% indicating that the highest positive kets. Ameer (2012) investigated the impact of
return was obtained in 2005 when there was a boom in macroeconomic conditions on new offerings in Malay-
the market and highest negative return was obtained sian market during January 1990 to December 2008 and

No. of IPOs Underpricing Minimum Maximum Standard deviation

TABLE 3 Extent of underpricing
of Indian IPOs
300 18.03% −79.59% 274.97% 41.11
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
CHHABRA AND KIRAN 985

TABLE 4 Descriptive statistics of IPOs during two time horizons

Panel A: Pre-recession (2005–2008)

Average returns Maximum returns Minimum returns No. of issues % of total issues
24.34% 274.97% −72.00% 188 63%
Panel B: Post-recession (2009–2012)

Average returns Maximum returns Minimum returns No. of issues % of total issues
7.45% 137.90% −79.59% 112 37%

TABLE 5 Comparison of short run returns during pre- and post-recession

Group Mean Standard deviation Calculated z-value Significance level Critical z-value
Pre-recession (N = 188) 24.34 43.58 3.75 5% significance level 1.64
Post-recession (N = 112) 7.45 33.78

TABLE 6 Comparison of long run returns during pre- and post-recession

Group Mean Standard deviation Calculated z-value Significance level Critical z-value
Pre-recession (N = 188) −0.8945 2.6243 0.2699 5% significance level 1.64

observed that the negative returns were obtained after pre- and post-recession period. This indicates that tim-
the Asian financial crisis in 1997. According to ings of the offering do not affect the long run perfor-
Saha (2012), the number of IPOs augmented since mid- mance. The probable reason for this could be that the
1990 after the market became global. The new issue mar- aftermath of the long run performance of the IPOs
ket was quite depressed during 1995–1996 to 2002–2003. offered during pre-recession period (particularly in 2008)
The perception and sentiments of the investors also would be measured when the economic cycle would have
depend upon the prevailing market condition. It has been been in some other phase (in post-recession period). To
found that the investors' sentiments play a significant measure the long run performance of IPOs offered in
role in determining the American depository receipt 2008, the returns during 2009, 2010 and 2011 have been
(ADR) returns for Asian and Latin American emerging considered. It might not reflect the effect of recession in
economies during 1990–2007 (Lee et al., 2011). the long run performance, while it has an impact on the
Furthermore, to calculate the long run performance short run performance. As a result, there is no significant
of new issues, Buy and Hold Abnormal Returns difference in the long run performance of the issues
(Equation (2)) has been used. The total sample size for offered during pre- and post-recession period.
long run performance has reduced to 299 as the after- The characteristics of the continuous informational
listing price of “TAKSHEEL SOLUTIONS LIMITED” variables have been displayed in Table 7. It has been
IPO is not available. While measuring the BHAR, the found that the mean value of total assets of the company
value of P2 and P3 for this IPO is not available. Therefore, (size of the firm) is 20,537.45 (Rs. million) and the aver-
this IPO has not been included in the sample for measur- age issue size is 4,742.70 (Rs. million). The average age of
ing long term performance. The average long run returns the firm is 16.27 years and average stake sold by the pro-
for 299 IPOs are negative with a value of −0.92193, which moters is 21.96%. The mean values of timings of the offer
indicates that the IPOs underperform in the long run all- and IPO grading have not been considered as these vari-
owing us to accept H1b: the average 3 year returns (Buy ables are discrete and a dummy variable has been used as
and Hold abnormal returns, BAHR) are not zero. a proxy for each one of them.
When the long run performance during pre-recession Furthermore, to demonstrate the effect of information
and post-recession period is evaluated, the findings as on first day returns, SEM model has been designed. SEM
reported in Table 6 disclose that the calculated z-value is has potential advantages over linear regression models
less than the z-critical value. Hence, null hypothesis is that make SEM a priori the method of choice in ana-
accepted and it can be concluded that there is no signifi- lysing path diagrams when these involve latent variables
cant difference in the returns of IPOs in long run during with multiple indicators.
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
986 CHHABRA AND KIRAN

T A B L E 7 Descriptive Statistics of
S. No Informational variable Mean Standard deviation
continuous informational variables
1 Size of the company (Rs. million) 20,537.45 87,356.40 during 2005–2012
2 Issue size (Rs. million) 4,742.70 135.20
3 Age of the firm 16.27 14.98
4 Promoters' stake sold (%) 21.96 12.14
5 Rank of the underwriter 10.57 6.23

F I G U R E 3 Structural model depicting relation of information and underpricing [Colour figure can be viewed at
wileyonlinelibrary.com]

Since the present study has considered information is internal factors. It has also been found that the major
an intermediary that consists of these informational vari- contributors towards external factors are IPO grading,
ables which further affects the first/listing day returns, Timings of the offer and underwriters' reputation. The
therefore SEM is preferred over the regression. The struc- results of the study support the theoretical predictions.
tural model has been depicted through Figure 3. Hence, the hypotheses (H2 to H5 and H7 to H8) are
The model utilizes information as the latent variable accepted as they are making significant contribution in
which comprises of internal and external factors. The influencing the first day returns. The results are
internal factors include size of the company, post pro- supported by (Atiase, 1985; Freeman, 1987) that the
moters' stake, age of the firm and issue size and the exter- larger firms are likely to experience low information
nal factors include IPO grading, timing of the offer and asymmetry issues.
underwriters' reputation. The results of structural model The model also shows that the post promoters' stake
reveal that the size of the company, age of the firm and (a component of internal factor) is statistically insignifi-
issue size are significant variables contributing towards cant at 5%. The findings of the current research are
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
CHHABRA AND KIRAN 987

TABLE 8 Results of hypotheses testing

S. No. Hypotheses Status

H 1: The first day market adjusted returns (MAER) are not zero Accepted as supported by Ritter (1991); Kumar (2007); Heerden
in short run. and Alagidede (2012)
H2: Size of the firm influences the extent of underpricing. Accepted as consistent with the results of Burrowes et al. (2004),
Schultz (1993), Titman and Wessels (1988)
H 3: The size of the issue has an impact on the extent of Accepted as corroborated by Fernandez et al. (1993); Amihud
underpricing. et al. (2003)
H 4: The age of the firm has an impact on the listing day returns. Accepted as the results are in line Guner et al. (2000)
H 5: The sale of promoters' stake during the issue affects the first Rejected and the results are supported by Zamanian et al. (2013)
day returns.
H 6: IPO grading affects the level of underpricing. Accepted indicating that grading affects the listing day returns to
a greater extent.
H 7: Reputation of the underwriters affects the first day Accepted. The result is in line with Rock (1986); Wang and
performance of offerings. Wilkins (2007); Bradley et al. (2009).
H 8: Timings of the offer affect the first day returns. Accepted as supported by Su (2004) highlighting that the extent
of underpricing is less during favourable market conditions.

supported by Copeland and Galai (1983) who found that underwriter; x6: Timings of the offer; x7: IPO grading and
the insider concentration coefficient is insignificant in y: first day returns.
adverse selection spread where the adverse-selection The results suggest that when x1 increases (decreases)
spread is the revision in market-maker expectations of by 1 standard deviation, on an average, y will also
stock resulting from the submission of an order. The increase (decrease) by 0.553 standard deviation keeping
results are also consistent with a study by Zamanian, x2, x3, x4, x5, x6, x7 constant. Similarly, when x2 increases
Khodaparati, and Mirbagherijam (2013). The study high- (decreases) by 1 standard deviation, on an average, y will
lights that the corporate ownership do not have any sig- increase (decrease) by 0.268 standard deviation keeping
nificant influence on the short run performance. The other variables to be constant. Also, when x4 increases
results for the same are displayed through Table 8. (decreases) by 1 standard deviation, on an average, y will
The results of the study are consistent with that of increase (decrease) by 1 standard deviation keeping x1,
Beatty and Ritter (1986) highlighting a significant impact of x2, x3, x5, x6, x7 constant. Furthermore, when x5 increases
availability of information on price determination and price (decreases) by 1 standard deviation, on an average, y will
performance of IPOs. Hanley and Hoberg (2008) also reveal increase (decrease) by 0.281 standard deviation keeping
that more disclosures by management in the IPO prospec- x1, x2, x3, x4, x6, x7 constant. Similarly, when x6 increases
tus result in less underpricing. Miller (1977) suggests that (decreases) by 1 standard deviation, on an average, y will
with the passage of time as more information leaks out, the decrease (increase) by 0.937 standard deviation keeping
variance in the investor's opinion reduces and firms are other variables constant. Also, when x7 increases
unable to maintain their earning momentum which leads (decreases) by 1 standard deviation, on an average, y will
to fall in the price and returns reduces over longer time. increase (decrease) by 0.945 standard deviation keeping
In the model presented, dependent and independent x1, x2, x3, x4, x5, x6 constant. The p-value indicates that
variables are standardised variables because z-score of the contribution of x3 is insignificant.
the variables have been considered. The model has zero The data related to measurement model along with
mean value and standard deviation is one which makes goodness of fit indices has been shown in Table 9. As
the intercept zero thus, it is the regression through highlighted through Table 9, the model is good fit as per
origin. RMSEA, CFI, TLI and SRMR Goodness of Fit indices.
The regression equation for the model is: The fit indices of the research model are acceptable
RMSEA = 0.053; CFI = 0.978; TLI = 0.967; and
y = 0:553x1 * + 0:268x2 * −0:095x3 + x4 * SRMR =0.051.
+ 0:281x5 * −0:937 x6 * + 0:945 x7 * The model fit statistics indicate that Chi-square is sig-
nificant. The model is a good fit. A “good fit model” indi-
where x1: Age of the firm; x2: Issue size; x3: Promoters' cates that the model is plausible. The Chi-squared test
stake sold; x4: Size of the company; x5: Rank of the indicates the difference between observed and expected
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
988 CHHABRA AND KIRAN

TABLE 9 Structural model

Measurement model

Estimate Standard error Z P > │z│

Age 0.553*** 0.104 5.31 0.000
Issue size 0.268 *** 0.065 4.10 0.000
Promoters' stake sold −0.095 0.063 −1.49 0.135
Size of the company 1*** 0.149 6.68 0.000
Rank of the underwriter 0.281*** 0.017 15.68 0.000
Timings of the offer −0.937 *** 0.039 −23.92 0.000
IPO grading 0.945*** 0.040 23.63 0.000
Goodness of fit indices
Actual value Recommended References
value/range
Chi-square (19) 34.844 [p: 0.015] p ≥ 0.05
Chi-square/df 1.833 ≤5.0
RMSEA 0.05 ≤0.05 Browne and Cudeck (1993)
CFI 0.978 ≥0.9 Bentler (1990); Browne and Cudeck (1993); Hu and Bentler (1999)
TLI 0.967 ≥0.9 Jöreskog and Sörbom (1993)
SRMR 0.051 ≤0.08 Browne and Cudeck (1993)
CD 0.895

Note: ***Significant at 0.01 level based on one-tailed tests.

covariance matrices. In this model the value of Chi Bentler, 1999). In the present study, the CFI value is
Square is 34.844 (df:19). The recommended range for 0.978; thus, the model is in good fit.
Chi-square/df is ≤5.0. The model has the value 1.833 and The non-normed fit index (NNFI, also known as the
is in the recommended range; therefore the model has Tucker-Lewis index, as it was built on an index formed
good fit indices and thus is acceptable. The value of coef- by Tucker and Lewis, in 1973 resolves some of the issues
ficient of determination is 0.895. Hence 89.5% variation of negative bias, though NNFI values may sometimes fall
in listing day returns/ underpricing has been explained beyond the 0 to 1 range. Tucker-Lewis index in the model
by the model through information composed of various is 0.967 and is acceptable.
internal and external factors. The root mean square residual (RMR) and standard-
The root mean square error of approximation ized root mean square residual (SRMR) are the square root
(RMSEA) avoids issues of sample size by analysing the of the discrepancy between the sample covariance matrix
discrepancy between the hypothesized model, with opti- and the model covariance matrix. The RMR may be some-
mally chosen parameter estimates, and the population what difficult to interpret, however, as its range is based
covariance matrix. The RMSEA ranges from 0 to 1, with on the scales of the indicators in the model. The standard-
smaller values indicating better model fit. A value of 0.05 ized root mean square residual removes this difficulty in
or less is indicative of acceptable model fit. In this model, interpretation, and ranges from 0 to 1, with a value of 0.08
the value of RMSEA is 0.05 which is acceptable. Thus the or less being indicative of an acceptable model. The value
model fits on RMSEA statistics. of SRMR is 0.051. Consequently the results suggest that
The comparative fit index (CFI) analyses the model fit the model is a good fit model as it satisfies the fit indices.
by examining the discrepancy between the data and the
hypothesized model, while adjusting for the issues of
sample size inherent in the chi-squared test of model fit 5 | CONCLUSION AND
and the normed fit index. CFI values range from 0 to IMPLICATIONS
1, with larger values indicating better fit; a CFI value of
0.90 or larger is generally considered indicating accept- The study highlights the importance of availability of
able model fit (Browne & Cudeck, 1993; Hu & information on short run performance of IPOs. The
 10991158, 2022, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2186 by The University Of Manchester, Wiley Online Library on [21/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
CHHABRA AND KIRAN 989

investigation finds that most of the new issues during international investors is common in IPOs of emerging
2005–2012 are underpriced with an average return of markets. The findings of the study are expected to be
18.03%, thus proving winners' curse hypothesis. The useful to the practitioners in predicting the pricing of
study has tried to extract the informational variables IPOs based on the significant factors influencing the
affecting the first day returns. A structural equation price performance. The findings of the research have
model has been designed with Information as a latent strong implications for the policy makers by identify-
variable which is composed of internal and external fac- ing the factors influencing the short run performance.
tors. The variables contributing towards internal factor The market intermediaries can use this for analysing
are size of the company, issue size and age of the firm the impact of informational variables on the perfor-
whereas it has been found that the role of post promoters' mance of IPOs.
stake is insignificant in affecting the information. The
underwriters' reputation, IPO grading and timings of the
offer contribute towards external factor. The findings 6 | L I M I T A T I O N S OF TH E S T U D Y
indicate that informational variables have a significant
effect (CD = 0.895) on underpricing/first day returns. The limitations of the present study originate mainly
The earlier studies have not significantly highlighted the from the database used for measuring the performance
important role of information for gauging the perfor- of IPOs. There are a number of variables that influence
mance of IPOs; rather the focus is on all the individual the price performance of new issues and the details of
factors. The study has identified that the returns during all these are not easily available. Hence, all the variables
pre-recession period (2005–2008) are not same as that of are not considered in the present study, only seven vari-
returns in post-recession period (2009–2012) indicating ables are examined. Another primary limitation of the
that timing of the offer has a significant influence on the study is that the majority of the factors identified are
short run performance of IPOs. The results also indicate from literature developed aboard. Also, there is sparse
that the average long run returns are negative and there literature available in India for the comparison of per-
is no significant difference in the long run performance formance in different phases of economy. However,
during pre-recession and post-recession period. Thus, it these limitations may focus on opportunities for future
can be concluded that economic cycle affects the listing areas of research too.
day returns of new issues.

7 | FUTURE SCOPE O F RESEARCH

5.1 | Theoretical implications
This study has identified factors influencing short run
The study ascertains that on the first day of trading, new performance. For future work, more factors can be con-
issues provide abnormal returns. Hence, investors can sidered in the study. Moreover, since this research was
mobilize their funds in IPOs to earn excess return in a carried out for the IPOs listed on NSE, the same can be
short period. The results of the current research may help extended for the IPOs listed on BSE. The similar research
investors to identify whether IPOs obtain higher returns can be conducted on the IPOs for a longer time frame
than equity in a short period. The study also contributes to and more number of variables.
the capital market literature for emerging economies by
contributing additional evidence on Indian IPOs by inves- DATA AVAILABILITY STATEMENT
tigating the effect of various factors on short run and long Data sharing is not applicable to this article as no new
run performance. With the development of Information data were created or analyzed in this study.
and Communication technologies, the role of information
is increasing in the knowledge era. Thus, the findings of
ORCID
the study are expected to be helpful and valuable to the
Sheena Chhabra https://orcid.org/0000-0001-5458-5823
practitioners for understanding the pricing of IPOs on the
basis of informational aspects covered in the study.
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