‘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, UnderpricingTable 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 262.3 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... 22List 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 16 16 18 69 n 99 99 102 104 107 109 113 417 a1 124 127 130 134 137List 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 155 155 156 156 187 157 159 159 160 160 161 161 162 162 163 163 164 164 165 165Appendix 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) 166 168 167 167 168 168 169 168 170 170 1 ” 472 174 174 175 vaAppendix 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 176 176 477 177 178 178 179 179 180 180 181 182 194 198 201