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UNDER-PRICING AND LONG-RUN
PERFORMANCE OF INITIAL PUBLIC
OFFERINGS IN INDIAN STOCK MARKET
Dr. S. Janakiramanan
Associate professor
Singapore Management University
SINGAPORE MANAGEMENT UNIVERSITY
(LEE KONG CHIAN SCHOOL OF BUSINESS)
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INTRODUCTION
The transition from being a private company to a public one is one of the most
important events in the life of a firm. It is also one of particular interest to institutional
investors, and the transition is facilitated through the initial public offering (IPO) process.
The IPO provides a fresh source of capital that is critical to the growth of the firm and
provides the founder and other shareholders such as venture capitalists a liquid market for
their shares. From an institutional investor's perspective, the IPO provides an opportunity to
share in the rewards of the growth of the firm.
When a firm issues equity to the public for the first time, it makes an initial public
offering consisting of two kinds of issues – the primary issue and the follow-on issue. In a
primary, the firm raises capital for itself by selling stock to the public, whereas in the followon
issue, existing large shareholders sell to the public a substantial number of shares they
currently own.
It is a well documented fact that IPOs tend to be generally under-priced, though some
issues tend to be overpriced. From the viewpoint of financial research, IPO under-pricing in
the sense of abnormal short-term returns on IPOs has been found in nearly every country in
the world. This suggests that IPO under-pricing may be the outcome of basic problems of
information and uncertainty in the IPO process, and is unlikely to be a figment of institutional
peculiarities of any one market.
There have also been various studies made to suggest the reasons for such underpricing.
From the investors’ point of view, this under-pricing appear to provide the sure and
quick profit that most dream about. Though first day return could vary, few of...