‘A Study of Underpricing, Ownership and Liquidity of Initial Public Offers (1PO}
‘and Their Impact on Performance of IPO Stocks in Indian Financial Markets
an
ana ee
TAY INDORE
‘A Thesis Submitted in Partial Futfillment of the Requirements for
the Fellow Programme in Management
Indian Institute of Management
indore
By
Pasupuleti Venkata Vijay Kumar
Submitted on
March 2012
Thesis A
ry Committee:
‘jay Kumar Gupta
(Chairman)
AAT RL 1h —
Prof. Dipayan D. Chaudhuri
(Member)
Proms
ig
(Member)Abstract
Post liberalization of primary markets in the year 1993, the Indian market has moved
Closer to the world economy. AS a resull, the policy changes and regulations of the
Indian primary tmarkot have dynamically advanced as per the requirements of the
economy. The present study attempts to understand the characteristics of |POs in the
Indian market post liberalization through a comprehensive assessment of critical factors
that influence the performance of IPO stocks in both long and short term performances.
Review of extant literature suggests three such factors: Underpricing, Liquidity and
Owmership Structure. While researchers have analyzed these factors individually, there
is_dearth of literature investigating simultanoous interaction effects of the three factors
fon IPO performances. To fill such gap, the study first develops a theory driven’
Conceptual model that measures the impact of the three factors on post IPO
performance, Further, the model is tested with IPO performance data for the period
50002010. To eliminate abnormalities arising from ‘internet bubble’, data from pre-2000
fra is not used for the analysis. Ordinary least square regression analysis is used for
Snalyzing the relation between two variables and multiple regression analysis is used
for the analysis of the comprehensive model.
‘The study found that underpricing has significant impact upon short term performance
and subscription rate. Underpricing was found to have non-significant relation with the
llocated ownership variables, Ownership variables wete found to have influence upon
Both tong term and short term liquidity. Liquidity was found to have consistent influence
‘upon the performance of IPO stocks in both short and long terms. A holistic study of the
three characteristics provided explanation for above 80 percentage variance of short
term performance ang 20 percont variance of Jong term performance, The inclusion of
Tiquidlty and ownership variables. in the model resulted in significant increment in
‘explain-ability as compared to results of prior studies for long term performance,
‘The study contributes 10 literature by providing a comprehensive model intertinking
major factors that affect IPO stock performance. It also highlights the presence of highet
Smnount of underpricing in the Indian markets and their impact on past-performance of
TBO stocks. The role of allocated ownership structure and Tiquidity on the performance
Of IPO In the short and long terms is also emphasized. This study has significance in
Quiding the formation of IPO portiolos in terms of tenure to be invested and tne
Composition of the portiolios to be formed in Indian financial markets.
Key Words: IPO, Liquidity, Ownership Structure, Performance, UnderpricingTable of Contents
Abstract... '
‘Acknowledgement. ii
List of Tables...
List of Figures. vi
List of Appendices... vii
1. Introduction
41.1 Capital structure
1.2 Financial Markets
1.3 Initial Public Offer (IPO).
41.4 Reasons for IPO.
4.5 Characteristics of PO
4.5.1 Underpricing phenomena
1.6.2 Ownership and control
1.5.3 Liquidity
1.8.4 Performance...
1.6 Influencers Of IPO..vnssnesnnnennnne
1.6.1 Processes of IPO
4.6.2 Market environment.
4.6.3 Other Major influencers
41,7 Indian Financial Markets’ IPO scenario...
4.7.1 Brief history of CCl, SEBI, BSE, NSE
4.7.2 IPO Scenaric (post 1999)...
2. Literature Review
2.1 Processes of IPO
2.2 Underpricing.... eo 262.3 Ownership Structure... 46
24 Liquidity... woe 54
2.5 Performance.
2.6 Control Variables.
3. Research gap and Questions...
4, Data and Methodology
5. Data AnalySis nn
6. Discussion and Implication... 2 136
7. Conclusion. on 1B
8, Limitations of the SLY nnn 163
9. Future Research. 154
10. Appendix 155
11, References... 22List of Tables
Table 1.1
Table 1.2
Table 1.3
Table 2.4
Table 4.1
Table 5.1
Table 5.2
Table 5.3
Table 5.4
Table 5.5
‘Yable 5.6
Table §.7
Table £8
Table 5.9
Table 5.10
Table 5.11
Table 5.12
Table 5.13
Table 6.1
Total listed issues in Indian Markets from January 2000 to
December 2010.
Indian Market scenario between January 2000 and December
2010 srs
Total IPOs floated in indian
December 2010. escent ne -
Summary of relation between dependent and independent
Variables... se
Construction of variables...csce.e
‘Anova test results of 1 year return and 3 year return with market
SCENATIO AS FACLOF. ores
Regression analysis of subscription rate and analyst
rating
Regression analysis of underpricing and subscription rate.
Regression analysis with offer size as dependent variable and
tunderpricing as dependent variable...
Summary of Regression analysis of short term performance
(dependent variable) and underpricing (independent variable.
Summary of Regression analysis of first year performance
(dependent variable) and underpricing (independent variable)
Summary of Regression analysis of long term pérformance
(dependent variable) and underpricing (independent variable)
‘Summary of Regression analysis of Liquidity (dependent variable)
land Ownership variables (independent variable),
‘Summary of Regression analysis of underpricing (dependent
variable) and Owmership variables (independent variable).
Summary of Regression analysis of short term performance
(dependent variable) and short term liquidity (independent variable).
Summary of Regression analysis of long term performance
(dependent variable) an¢ long term liquidity (independent variable.
Summary of Regression analysis of short term performance
(dependent variable) and short. term liquidity, underpricing,
‘ownership structure (independent variables).
Summary of Regression analysis of long term perlormance
(dependent variable) and long term liquidity, underpricing,
ownership structure (independent variables).
Descriptive statistics of IPO issues on the basis underrcng issued
in between January 2000 and December 2010.. es
farket
etween January 2000 and
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16
18
69
n
99
99
102
104
107
109
113
417
a1
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127
130
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137List of Figures
Figure 1.1
Figure 1.2
Figure 1.3
Figure 1.4
Figure 2.1
Figure 3.1
Figure 3.2
Figure 3.3,
Figure 3.4
Figure 3.5
F gure 3.6
Faure $4
F gure 6.1
Total IPO issues per month in the Indian Markel between January
2000 and December 2010.
Scenario of Indian Market between January 2000 and December
2010
Total IPO issues amount raised in Indian Market between January
2000 and December 2010.00...»
Total IPO issues floated in the Indian Market between January 2000
and December 2010. saebteseserectiesTiain .
Theory driven conceptual model...
Relationship of subscription rate and underpricing,
Relationship of offer size and underpricing,
Relationship of underpricing and performance of IPO stocks..
‘The relationship of ownership structure and liquidity of IPO stock
The relationship of underpricing and ownership structure of IPO
SOCKS. soe 7
The relationship of liquidity with performance of IPO stocks.
‘Means of returns of IPO stocks across the time periods,
Number of IPO issues with respect to underpricing issued in
between January 2000 and December 2010..List of Appendices
Appendix 4
Appendix 2
Appendix 38
Appendix 3b
Appendix 4a
Appendix db
Appendix 5a
Appendix 5b
Appendix Se
Appendix 5d
Avpendix 6a
Appencix 6b
Appendix 6
Appendix 4
Appendix 86
Appendix 61
Appendix 6g
Appendlx 6h
Appendix 7a
Appendix 7b
Appendix Te
Appendix 7d
1PO equity issue structure
ANOVA analysis ~ Mean retuins of each term on the basis of
underpricing .
Normality curve ~ Regrassion analysis of Subscription rate and
underpricing
Normality curve ~ Regression analysis of subscription rate and
underpricing..
Normality curve ~ Regression analysis of underpricing and
logarithmic offer size.
Normality curve - Regression analysis of market adjusted
underpricing and logarithmic offer size.
Normality curve ~ Regression analysis of underpricing and first
WEEK FeMUM nn
Normality curve ~ Regression analysis of underpricing and
market adjusted frst week return...
Normality curve ~ Regression analysis of underpricing and frst
month return
Normality curve ~ Regression analysis of underpricing and
market adjusted frst month return...
Normality curve ~ Regression analysis of underpricing ard first
year return.
Normality curve ~ Ragression analysis of underpricing and
rmarkel adjusted frst year return.
Normality curve ~ Regression analysis of underpricing and three
year return.
Normality curve ~ Regression analysis of underpricing and
market adjusted three year retum.
Normality curve ~ Regression analysis of underpricing and three
year return (point to point)
Normality curve ~ Regression analysis of underpricing and
market adjusted three year return (point to point.
Normality curve ~ Regression analysis of underpricing and six
months third year relum...
Normality curve — Regression analysis of underpricing and
market adjusted six months third year return
Normatity curve — Regression analysis of liquidity (first week
turnover rate) and ownership structure...
Normality curve — Regression analysis of liquidity (first year
MEC) and ownership structure.
Normality curve ~ Regression analysis of ligul
MEC) and ownership structure...
Normality curve — Regression analysis of liquidity (MEC of six
month returns in third year) and ownership structure...
ty (three year
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162
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164
165
165Appendix Ba
Appendix 8b
Appendix 8
Appendix 8d
Appendix Be
Appendix 8f
Appendix 9a
Appendix 9b
Appendix 96:
Appendix 9d
‘Appendix 108
‘Appendix 10b
Appendi. 10¢
‘Appendix 104
Appendix 10
Appendix 101
Appendix 1a
Appendix 11
Appendix 116
Appendix 144
Normality curve ~ Regression analysis of retail ownership and
underpricing : ae
Normality curve ~ Regression analysis of retail ownership and
market adjusted underpricing =
Normality curve ~ Regression analysis of non-institutional
‘ownership and underpricing. seven
Normality curve ~ Regression analysis of non-instituttonal
‘ownership and market adjusted underpricing........
Normality curve ~ Regression analysis of Qualified institutional
ownership and underpricin a _
Normality curve - Regression analysis of Qualified institutional
ownership and market adjusted underpricing. .
Normality curve - Regression analysis of first week return and
liquidity (rst week turnover rate) 2 :
Normality curve - Regression analysis of market adjusted first
wook return and liquidity first week turnover rate)
Normality curve ~ Regrossion analysis of first year return and
fiquidity (MEC of frst year return) .o..nrsense ses sa
Normally curve ~ Regression analysis of market adjusted first
year return and liquidity (MEC of first year return) .
Normality curve - Regression analysis of three year return and
liquidity (EC of three year return)... -
Normality curve - Regression analysis of market adjusted three
year return and liquidity (MEC of three year return) wae
Normality curve ~ Regression analysis of three year return (point
to point) and liquidity (MEC of three yee return)
Normality curve ~ Regression analysis of market adjusted three.
year return (point to point) and liquidity (ME. of three year
return) oath & -
Normality curve ~ Regression analysis ot six months return of
third year and liquidity (MEC of six months in third year return).
Normality curve ~ Regression analysis of market adjusted six
‘months return of third year and liquidity (MEC of six months in
third year relUrm) «..-ssoenesesessere ‘ .
Normality curve ~ Regression analysis of frst week return and
Uundorpricing, ownership structure, liquidity (first week turnover
rote)... aaa :
Normality curve ~ Regression analysis of market adjusted first
‘week retum and market adjusted underpricing, ownership
structure, liquidity (first week turnover rate) .. =
Normality curve ~ Regression analysis of first year return and
underpricing, ownership structure, liquidity (MEC of frst year
retuins) ... < : : 2
Normality curve ~ Regrassion analysis of markt adjusted first
year return and market adjusted unclerpricing, ownership
Structure, liquidity (frst week turnover rate)
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1
”
472
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175
vaAppendix 12a
Appendix 12b
Appendix 126
‘Appendix 126
Appendix 126
Appendix 12
Appendix 132
Appendix 136
‘Appendix 13
Appendix 130,
Appendix 14
Appendix 15a
‘Appendix 15b
‘Appendix 15¢
Appendix 18d
Normality curve ~ Regression analysis of three year return
(cumulated return) and underpricing, ownership structure,
Normality curve - Regression analysis of three year return (point
to point) and underpricing, ownership structure, liquidity (MEC of
three year returns)
Normality curva ~ Regression analysis of markel adjusted three
year return (point to point) and market adjusted underpricing,
‘ownership structure, liquidity (MEC of three year returns).
Normality curve — Regression analysis of six months return in
third year and underpricing, ownership structure, liquidity (MEC
of six months return in third year)
Normality curve — Regression analysis of markel adjusted six
months return in third year and market adjusted underpricing,
ownership structure, liquidity (MEC of six months return in third
year) .
Descriptive statistics of IPO offer variables...
Descriptive statistics of allocated ownership variables.
Descriptive statistics of liquidity variables, -
Descriptive statistics of performance variables,
List of rating agancies.........
Literature review of underpricing
Literature review of Ownership Structure.
Literature review.of Liquidity.
Literature review of Performance
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