Revisiting IPO Underpricing in India

Abstract

This paper attempts to identify the factors explaining IPO underpricing in an emerging economy, India, using 1842 companies that got listed on the Bombay Stock Exchange (BSE) from 1993 to 2001. Unlike the existing works that analysed the relation of ex-ante risk proxies and underpricing, this paper concentrates on volatility of stock return just after listing and underpricing of Indian IPOs. Contrary to the theoretical prediction, this paper finds a negative relation of underpricing and volatility. This apparent contradiction could be due to the investors' optimism during the offer period and subsequent revision in prices (immediately after listing) with the availability of new information during the long offer-listing period. The high average risk, significant negative relation between risk and underpricing during the high volume (hot) period and insignificant relation of the same during the cold period suggest that some of the issuers took the advantage of investors' optimism to collect as much money as possible during the hot period. The enthusiastic investors' paid a high price, but their uncertainty about the future viability of the project became evident with the subsequent disclosure of information during offer to listing period, which found its expression through the after market volatility.

Keywords: IPO, Underpricing, India, Risk

JEL Classification: G30, G31