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Asia-Pacific Business Review

Vol. IV, No. 4, October - December 2008 pp. 24-37. ISSN: 0973-2470

Deter minants of Initial and Long-R un Perf or mance Long-Run Perf erfor Stock Mark of IPOs in Indian Stock Mar ket
Shikha Sehgal* and Balwinder Singh**
The paper investigates the possible determinants of underpricing and the long-run performance of 438 Indian initial public offerings (IPOs) listed on the Bombay Stock Exchange during June 1992 - March 2001. The mean underpricing has been found to be 99.20 per cent, which is very high if compared with the international evidence. Age of the firm, listing delay at IPO and number of times the issue is subscribed have been found to be the important determinants of underpricing. Indian IPOs do not tend to underperform in the long-run and underpricing has been primarily found to explain the long-run performance. The study, thus provides evidence of overreaction hypothesis. Keywords: Initial Public Offerings, Underpricing, Long-Run Performance.

Introduction
Initial public offerings (IPOs) provide an opportunity to the fast growing companies to raise necessary capital to facilitate future growth. The investors also consider IPOs an attractive investment alternative as these are believed to generate relatively higher returns in less time. Regardless of the perceived value of IPOs for the companies and the investors, three empirical anomalies have been documented by the financial economists in the initial public offerings market namely IPO underpricing1 (i.e. positive excess returns in the short-run); strong concentration of issue activity in certain periods 2 (hot issue phenomenon); and underperformance of IPOs in the long-run3. Initial public offerings have thus become one of the most puzzling and intriguing area for financial research. Over the past few decades, empirical studies have ubiquitously reported the frequent incidence of high positive average returns of IPOs on the first day of trading. This feature is referred to as underpricing and has been identified as a robust feature of new issues across the world (Loughran and Ritter (1995)). Besides, the prior research has also evidenced the post-issue underperformance of IPOs in the years subsequent to issue. The incidence of underpricing and underperformance of IPOs is inconsistent with stockmarket efficiency, which states that two portfolios with same risk shall receive same returns. Moreover, the abnormal performance of stocks after the firmspecific events should be neutral, once the eventrelated activities are completed (Stehle et al. (2000)).

The best-known pattern associated with the process of going public is the frequent incidence of large initial returns accruing to investors in IPOs of common stock (Ritter, 1997). Underpricing has been documented to be present in varying degrees by the opulent financial literature across different countries. As can be observed from Table 1 in appendix, very high underpricing exists in China, India, Brazil, Thailand, Greece, Japan, etc. and comparatively lesser underpricing has been documented in countries like Austria, Germany, Australia, U.S. and Tunisia. A plethora of theoretical explanations have been offered to elucidate the persistence of such phenomenon. Ibbotson (1975) offered explanations for underpricing of IPOs which have been duly tested in the literature. A strand of literature attributes underpricing to the signalling by the IPO firms (Allen and Faulhaber (1989), Grinblatt and Hwang (1989), Welch (1989) and Chemmanur (1993). High quality firms are believed to signal their quality by underpricing their first issue and by offering smaller proportion of their shares at initial public offering, which enables them to issue more shares at higher returns in the subsequent equity offerings. Hence, the likeliness of subsequent issue is more for the firm that underprices. The signalling hypothesis has been tested and both supporting (Firth and Liau Tan (1997)) and contradicting (Michealy and Shaw (1994), Chi and Padgett (2005)) evidences have been reported. In contrast to signalling hypothesis (which states that IPO firms signal their value through underpricing and higher degree of underpricing is a signal of an expected profitable subsequent issue), market

Department of Commerce and Business Management, Guru Nanak Dev University, Amritsar Vol. IV,Punjab, 4, October 143005, No. India Asia-Pacific Business Review *E-mail: shikha.asr@gmail.com, **E-mail: bksaini@gmail.com

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feedback hypothesis suggests that the relationship between underpricing and subsequent issues is dependent on the information revealed to issuers through share prices in the period subsequent to IPO (Jegadeesh et al. (1993)). Investment bankers where book building is used may underprice IPOs to induce informed investors to reveal information during the pre-selling period, which can then be used to assist in pricing the issue (Ritter (1997)). On the contrary, Espenlaub and Tonks (1998) do not find support for this hypothesis. Underpricing is also suggested to be the result of adverse selection or winners curse to uninformed investors (Beatty and Ritter (1986), Rock (1986), Ritter (1997)). Issues are believed to be deliberately underpriced, in order to compensate the risk of trading caused by informational disadvantage to the uninformed investors due to the existence of information asymmetry between groups of informed and uninformed investors. Chowdhry and Sherman (1996) point out that IPO firms in Hong Kong, India, Indonesia, Singapore, Malaysia, Thailand and Bangladesh tend to favour small investors over large investors, which reduces the adverse selection of winners curse problem (as cited by Yong (2007)). Certification role performed by investment bankers and auditors reduces the uncertainty in the IPO process. Underpricing is also believed to be effected by the certification hypothesis, which states that underpricing is dependent upon the reputation of the managers of the issue (Booth and Smith (1986), Beatty (1989), Affleck-Graves et al. (1993)). It is also hypothesized that firms underprice IPOs to reduce the probability of lawsuit against it by investors (Tinic (1988), Hughes and Thakor (1992) and Ritter (2003)). Thus, underpricing is used as an insurance against legal liability, as only the investors loosing money in IPOs can file lawsuits against the issuing firms. Voluminous literature exists on the post-issue performance of unseasoned equity issues and on the possible explanations for varying behaviour of the same across different markets. The IPOs have been found to underperform over the long-run as documented by Ritter (1991) and this is confirmed by various studies in and outside US. However, the IPO firms in countries like Japan, Korea, Spain, Malaysia, etc. have been found to perform better than or equally as non-IPO firms (See Table 1). Ritter (1991) and Loughran and Ritter (1997) propose that long-run underperformance is the result of windows of opportunity or market timing hypothesis, according to which managers select the timing that market

overvalues their stock to issue new equity, in order to take advantage of favourable market conditions to lower the cost of capital. However, Kang et al. (1999) find that underperformance persists even after the market timing variable is controlled for. experience long-run. In other words, the overreaction or fads hypothesis argues that IPOs may be correctly priced but investors overvalue the new issues in the early aftermarket. Therefore, under the assumption of efficient markets, the price of IPOs should reach their equilibrium price leading to a negative correlation between initial returns and long-term performance of IPOs (Shiller (1990)). Hansen and Crutchley (1990), Jain and Kini (1994), Loughran and Ritter (1997) and Brav et al. (2000) provide evidence in support of role of investor overoptimism in explaining the long-run underperformance. Divergence of interest between managers and shareholders also causes firms to underperform in the long-run (Jensen (1986) and McLaughlin et al. (1996)). Principal-agent problems arise after a company becomes a public company (Jensen and Meckling (1976)). There is an increase in the agency cost as the conflict between the managers and the shareholders becomes worse because of decline in the entrepreneurs ownership and dispersal of ownership subsequent to the IPOs. Underperformance of IPOs in the long-run can also be due to divergence of opinion about the value of firm at the time of IPO, which further declines with time (Miller (1977)). If there is a great deal of uncertainty about the value of IPO the valuations of optimistic investors will be much higher than those of pessimistic investors (Ritter (1997)). Greater divergence of opinion exists for a company which is new as there is greater uncertainty about its future, however the divergence of opinion reduces as the company develops an operating history (as it becomes easier to forecast its future earnings and dividends). The higher the divergence of opinion, the worse the long-run performance is likely to be (Miller (2000)). The empirical evidence posits that the IPO firms experience underpricing in the short-run and over the long-run their performance deteriorates. All the hypotheses pertaining to pricing and performance of IPOs have been formulated and tested primarily in developed markets. Consequently, it is warranted to test the applicability of these hypotheses in an emerging market like India. Despite the importance for policy-makers, portfolio managers, shareholders and corporate managers, no conclusive evidence exists on the determinants of this phenomenon in

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India. This study aims to extend the IPOs literature on emerging markets geographically by investigating the factors explaining the underpricing and long run performance of Indian IPOs.

Indian IPO Market

In the pre-reform period, it was mandatory to get the approval for all aspects of an issue (including its price) from the office of Controller of Capital Issues

(CCI). The abolition of CCI and establishment of Securities and Exchange Board of India (SEBI) in 1992 marked a paradigm shift in the market structure and functioning of Indian stock market by allowing free-pricing of issues and paving the way for market forces in the determination of pricing of issues and allocation of resources for competing uses. After the establishment of SEBI and allowance of free pricing of equity in 1992, there has been a surge in number of IPOs in India.

Year Source: Prime Database Note: Details relating to number of issues and proceeds raised are for equity issues only. Figure 1: Trends in Indian IPOs The trend of volume of IPOs in India can be observed from Figure 1 which exhibits substantial variations in number of IPOs and proceeds raised through them. The number of firms going public, increased considerably post 1992 but the upward progress experienced a decline after the year 1995-96. Though the proceeds raised from the issues have increased from 2003-04 onwards, but the number of issues have not increased that substantially, depicting that in recent years lesser number of issues with larger issue size have been made. The resources raised far exceed the number of issues in the year 2007-2008, which witnessed the biggest IPO in Indian IPO market. According to the Global IPO Trends Report 2007 by Ernst and Young, India has the largest number of both small and mid-cap public companies in the world and Indias exchanges rank eighth in the world for number of IPOs and value in 2006. Transition in the Indian capital market has evoked increased investor interest. The role of foreign capital and cross border activity by Indian companies continues to expand rapidly in India. Foreign institutional investors make up three-fourths of new funds flowing into the market, and therefore foreign capital is supporting much of Indias growth. (Ernst & Young - Global IPO Trends Report 2007). In fact, public issue has become the most popular way of raising finance in India. The sheer increase in number and volume of initial public offerings post-SEBI period has generated considerable research interest in Indian IPO market. Consequently, it is important to have definitive results on pricing performance of issuers in India and the factors determining it. This paper is an attempt in this direction.

Research Methodology
The study includes the IPOs of common stock listed on Bombay Stock Exchange (BSE) over the period

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June 1992 to March 31, 2001. The sample period starts from 1992, as the new regulatory regime in India became functional from 1992 onwards with SEBI replacing the CCI and free pricing of issues was allowed thereafter. Prior to 1992, all firms desirous of making an IPO in India had to get approval for all aspects concerning the issue from the office of CCI. The sample firms have been selected on the basis of the following criteria: (i) (ii) (iii) (iv) The firm is listed on the Bombay Stock Exchange (BSE). The IPO is of common stock. The IPO is from post-SEBI period and offered under free pricing era. The firm has atleast five years trading history from the date of its listing and is listed on BSE-Sensex on March 31, 2006.

hold investment strategy which presumes that an initial public offering is received at the first closing price and is kept in the portfolio over a period of t months. Barber and Lyon (1997) suggested that the cumulative abnormal returns are the biased predictors of buy and hold abnormal returns and favoured the use of the latter over the former. Long-term investors experience is better captured by compounding shortterm returns to obtain long-term buy-and-hold returns. The buy-and-hold return for firm i over a period of t months, is calculated by equation (2). Where Rit is the raw return for firm i and BHRiT is the holding period raw return for the firm i for T period (period of 12, 24, 36, 48 and 60 months).

(2) Determinants of Underpricing and Long-Run Performance In order to assess the determinants of underpricing and long run performance of Indian IPOs, multivariate regression analysis has been done. Based on the prior research, the variables have been identified and examined to explain the variations in the share price performance of IPOs (Chalk and Peavy (1987), Ibbotson et al. (1994), Michaely and Shaw (1994), How (2000), Dimovski and Brooks (2004) and Ghosh (2005)). The following variables have been used in this study to provide explanations to the variations in the share price performance of IPOs: Initial Returns: Initial return is the market adjusted initial return, calculated using BSESensex as the market index. Age: Age is the natural logarithm of one plus the difference between the year of going public and the year of incorporation. Offer Price: Offer price is the price at which the security is offered to the public at the first instance. Issue Size: Issue size of the firm is measured by the gross proceeds of the issue. Natural logarithm of the gross proceeds has been used. Listing Delay: Listing delay is the natural logarithm of the difference between the date of issue and the date of listing. Times Subscribed: Times subscribed is the number of times the issue is subscribed.

Firms with missing price data have been excluded from the sample. This criteria resulted in a final sample of 438 IPOs. Requisite data on these IPOs has been collected from the Capitaline and Capita Charts databases which provide fundamental and market data on more than 13,000 Indian listed and unlisted companies respectively and are maintained by www.capitalmarket.com. Returns have been calculated for initial return period defined as the offering date to the close of the first trading date, and the aftermarket return period defined as the five years after the IPO exclusive of the initial return period. The aftermarket period includes the 60 months subsequent to IPO date, where months are defined as successive 21 trading-days periods relative to the IPO date. Thus, month 1 consists of event days 1-21; month 2 consists of event days 22-42 after listing, and so on. (i) Initial returns: The initial return is defined as the percentage change of the stock price from the issue price and the closing price on the first trading day. It can be calculated by equation (1). Where, IRit is the market-adjusted initial return for stock i in the event month t, Pit is the closing price on the first trading day for firm i, and Pi0 is the subscription price. And Pmt is the closing value of BSE-sensex (used as the benchmark) on the first trading day for firm i, and Pm0 is the value of BSE-sensex on the subscription date. (1) (ii) Aftermarket returns: The long-run return of initial public offering i is calculated for a buy-and-

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Market Condition: Market condition dummy has been used as the proxy for general market conditions prevailing at the time of issue. Following Ghosh (2005), the hot and cold periods of Indian IPO market have been identified. The variable takes the value of one if issued in hot period and zero for cold period.

Analysis and Interpretations

Distribution of IPOs in terms of issues per year with their initial return and gross proceeds is presented in Table 2. The number and value of IPOs are not evenly distributed over the sample period. It can be observed from the table 2 that maximum number of issues in the sample took place in the year 1994-95, followed by the year 1993-94 and 1992-93. In fact, about 75% of the total issues came in the market during 1992 and 1995. Maximum gross proceeds (Rs.1790.23 million) were realized in the year 1997-98 and less than average proceeds were realized prior to 1996-97. The initial returns of IPOs are positive for all the sample years except 1996-97 and 1998-99, corroborating the evidence of high degree of underpricing by Indian

IPOs (See for example, Madhusoodan and Thiripalraju (1997), Ghosh (2005) and Singh and Mittal (2005)). The average underpricing across sample is 99.20 per cent, which is very high as compared to underpricing reported by other countries (see Table 1). In case of cumulative abnormal returns (CAR), underperformance appears in the second year after listing and from third year onwards Indian IPOs do not exhibit any underperformance. By the end of the fifth year the cumulative abnormal return is 184.64% which is very high if compared to evidence from other countries. This finding is thus not typical of IPO studies, which frequently document the presence of significant negative long-run performance. The Indian IPOs thus provide evidence of very high first day returns and very high abnormal returns over the long-run. Except for the second year post-offering, IPOs exhibit very high returns in the five years subsequent to the offering. It is imperative to find out the determinants of such aftermarket performance of IPOs. The following discussion, aims to analyse the various possible determinants of underpricing and long-run performance of IPOs in India.

Table 2: Distribution of IPOs by Year Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001 Total/Mean Number of Issues 52 105 169 44 10 4 6 22 26 438 Number of Issues(%) 11.87 23.97 38.58 10.05 2.28 0.91 1.37 5.02 5.94 100 Gross Proceeds (Rs. Million) 65.44 133.21 127.79 121.03 1767.27 1790.23 517.83 957.95 416.52 237.80* Initial Return (%) 70.88 120.79 105.24 39.33 (4.81) 41.98 (7.24) 316.01 20.63 99.20*

* represents the mean values Table 3: Long-Run Performance of IPOs Year 1 2 3 4 5 AR -1.03 0.56 4.70 4.54 4.65 CAR 3.90 -14.76 26.78 95.30 184.64

* CAR is obtained by addition of monthly abnormal returns 4.

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Determinants of Underpricing in India

A correlation matrix of the independent variable and the dependent ones has been computed and presented in Table 4. As can be observed that the age, offer price, issue size and listing delay are significantly and negatively associated with initial returns. While, number of times subscribed and market condition have significant and positive relation with

the initial returns. The independent variables are also associated with other independent variables but there is no multicollinearity among them. Existence of multicollinearity can be detected through correlation analysis. If the pair-wise or zero-order correlation coefficient between two regressors is high (in excess of 0.8), then the problem of multicollinearity exists between them. (Gujarati (2004))

Table 4: Correlation Matrix Variables Initial Return Age Offer Price Issue Size Listing Delay Times Subscribed Market Condition Initial Return 1 -.151** -.125** -.186** -.144** .481** .097** Age Offer Price Issue Size Listing Delay Times Market Subscribed Condition

1 .393** .286** -.120* -.024 -.165**

1 .669** -.235** .053 -.256**

1 -.186** -.072 -.447**

1 -.169** .276**

1 .006

* Significant at the 5% level ** Significant at the 1% level Regression model of Ordinary Least Squares (OLS) has been applied to decompose variation in initial returns into various factors. This technique helps in identifying the extent and direction of relationship between the dependent variable and several independent variables. The R square and the adjusted R square generated by it indicates the proportion of variation in the dependent variable explained by the independent variables. The following multivariate regression model has been used to examine the relationship between the initial return of IPOs and its possible determinants.

(3)

Table 5 presents the results of the multivariate regression taking initial return of IPO firms as dependent variable. The model is correctly specified as its F-value is high and significant which rejects the null hypothesis that the repressors have no impact on the regress and. The adjusted R square of the model is quite high too, that is the independent variables explain 27.7% per cent of variations in initial return of the IPOs. A perusal of regression results

reveal that age of the firm, listing delay and times subscribed significantly determine underpricing by an IPO firm. The times subscribed variable is very significant and has a positive sign, suggesting that the IPOs which are more oversubscribed are highly underpriced. Positive relationship between subscription and initial returns is consistent with winners curse hypothesis (Rock (1986)), indicating the oversubscription of good issues by all investors.

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Table 5: Results of Multivariate Regression Independent Variables Intercept Age Offer Price Issue Size Listing Delay Times Subscribed Market Condition R2 Adjusted R2 F-Value (P value) Estimated Coefficient 1.330 -.060 -.056 -.027 -.154 .014 .119 SE .304 .028 .037 .028 .053 .001 .083 0.287 0.277 27.979(.000) P value .000 .037 .131 .333 .004 .000 .150

Note: The dependent variable is underpricing, measured as the market adjusted initial return. Time gap between the date of registration of prospectus and listing on the stock exchange reflects informed demand for the issue. Issues that are sold quickly have higher level of investor demand and are thus expected to be more underpriced. On the contrary, issues with longer listing delay would be less underpriced due to possible lack of interest by informed investors (How (2000), Lee et al. (1994)). The results show that, listing delay is negatively related to underpricing implying that the IPOs that take more time to list after the offering underprice less as compared to those for which the gap between offer and listing is less. Furthermore, age of the firm is also significantly negatively related with underpricing, implying that young firms underprice more as compared to the established ones. Firms that are older and whose issue size is larger have lower ex-ante uncertainty and are less underpriced. This supports the hypothesis that IPOs with greater uncertainty will be underpriced more (Beaty and Ritter (1986), Rock (1986) and Lee et al. (1996). Offer price, issue size and market condition variables though statistically insignificant, have the expected signs with more underpricing resorted by the firms offering their IPOs at lower offer price, smaller issue size and in favourable market conditions and vice versa. severe underperformance has been reported in various countries across three and five years subsequent to the offering; however, IPO firms have been found to perform better in the long-run in many countries as well. In India, too mixed results have been reported and not much emphasis has been made to identify the factors that may explain the performance of IPOs in the post-issue period. To investigate the possible determinants of long-run performance of IPOs in India, various variables have been identified and tested. A correlation matrix of the independent and dependent variables is shown in Table 6. It can be observed that initial return and times subscribed are significantly and negatively associated with returns across all five years subsequent to issue. While, listing delay, reputation of lead managers and market condition have significant and positive relation with the returns for first three years, two years and one year after the issue respectively. The independent variables also have correlation amongst them, but the problem of multicollinearity is absent. In order to determine the factors that may explain variations in the long-run performance of IPOs, five multivariate cross-sectional regressions for five years subsequent to the year of IPO have been run. On the basis of existing literature, the following OLS regression model has been developed to find the determinants of long-run performance of IPOs in India:

Determinants of Long-Run Performance in India

The issue of performance of IPOs in the long-run has generated mixed results. As evident from in Table 1,

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Table 6: Correlation Matrix

Variables Return BHR1 BHR2 BHR3 BHR4 BHR5 Initial Return Age Offer Price Issue Size Listing Delay Times Subscribed Market Condition * Significant at the 5% level ** Significant at the 1% level .179** -.038 -.005 .258** .228** .128** .069 -.068 -.033 -.055 -.047 -.055 .058 -.117* -.101* -.119* -.065 -.096 -.053 -.033 -.014 .034 .004 -.166** -.307** -.322** -.325** -.290** 1 -.151** -.125** -.186** -.144** .481** -.066 .097** 1 .393** .286** -.120* -.024 1 .669** 1 -.235** -.186** .053 -.072 -.165** -.256** -.447** 1 -.169** .276** 1 .006 1 .368** .547** .653** .798** 1 .311** .592** .786** 1 .398** .726** 1 .719** 1 1 Price Size BHR1 BHR2 BHR3 BHR4 BHR5 Initial Age Offer Issue Listing Delay Times Market Subscribed Condition

The results of the model for OLS regressions using the five year buy and hold returns as independent variables are presented in Table 7. The dependent variables are Buy-and-Hold Returns (BHR) for 1, 2, 3, 4 and 5 years after issue. The adjusted R square is 0.113 for first year after the IPO, indicating that

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-.230** -.217** -.210** -.137** -.141** -.046

31

independent variables explain 11.3% variation in the long-run return. For second, third, fourth and fifth year subsequent to IPO, the value of adjuster R square is 0.129, 0.123, 0.114 and 0.100 respectively, which is quite higher than the evidence in literature1. F value is also statistically significant for all models.

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Table 7: Results of Multivariate Regression

Dependent Variable BHR1 SE value .516 .081 .048 .061 .047 .089 .002 .138 .127 .113 8.661 (.000) (.000) 9.944 .129 .123 9.492 (.000) .143 .138 .005 .014 .163 .930 -.115 .195 .556 .004 -.003 .003 .341 -.003 .003 .388 .001 .331 .106 .002 .110 .125 .380 .024 .003 -.310 .443 .008 .055 .886 -.040 .065 .543 -.114 .241 -.110 .073 .134 -.176 .086 .042 -.109 .836 -.028 .056 .626 -.004 .067 .952 .037 .074 .095 .073 .145 .004 .222 .129 .114 8.550 (.000) .118 -.500 .097 .000 -.673 .114 .000 -.835 .126 .000 -1.767 .612 .004 -.221 .728 .772 .599 .834 .473 .000 .618 .252 .118 .869 .460 .164 Coefficient value Coefficient value Coefficient value P Estimated SE P Estimated SE P Estimated SE P BHR2 BHR3 BHR4 Estimated Coefficient 1.100 -.742 .012 -.170 -.111 .028 .000 -.508 .946 .132 .080 .102 .077 .168 .004 .241 .116 .100 7.186 (.000) BHR5 SE P value .246 .000 .877 .095 .151 .866 .906 .036

Independent

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Variables

Estimated

Coefficient

Intercept

-1.903

Initial Return

-.127

Age

-.010

Offer Price

-.072

Issue Size

.036

Listing Delay

.305

Times Subscribed

-.007

Market Condition

.390

R2

Adjusted R2

F-Value

Vol. IV, No. 4, October - December 2008

(p value)

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The results show that initial return (except for first year) has a significant negative effect on the longrun buy and hold returns of IPO firms, which is consistent with the overreaction hypothesis, that is market in the long run corrects the overvaluation caused in the initial period. The results however contradict the signaling hypothesis that predicts a positive relation between underpricing and long-run returns. The underpricing is not found to be significant for explaining variations for the first year subsequent to issue, probably because the initial returns do not get fully realized during this time. Age of the firm does not have significant relationship with long-run returns, but has an inverse relationship with returns for first three years and a direct relationship with returns for fourth and fifth years. It suggests young firms perform better for the first three years though opposite is true for the next two years subsequent to issue. Size of the issue does not significantly explain the long-run returns and has a negative relationship with long run returns (except for first two years) suggesting that initially big firms have higher returns, however after first two years following the IPO, smaller firms seem to grow at a faster rate. Listing delay is positively related to longrun returns, though significant for only first two years after the IPO. Listing delay has a negative effect on underpricing, that is, the firms with larger time gap between offer and listing tend to underprice more; however a positive effect of listing delay on long-run performance suggests that firms with larger delay have better performance in the long-run. Times subscribed is negatively related to long-run returns for first three years, though is significant for only first year after the issue. Market condition has a significant and positive effect on first year returns.

variations in the first year subsequent to offering. The overall results of cross-sectional regressions for explaining the long-run performance of IPOs are consistent with the overreaction hypothesis. There is a negative relation between underpricing and longrun returns as over the long-run market corrects its overvaluation caused in the initial period once the initial returns are realised. Thus in line with the observed findings, investors should take caution while holding the highly underpriced stocks for more than one year after the issue. They give very high returns till the end of first year. However, the same stocks do not perform similarity in the four years following the year of issue.

References
Allen, F. and Faulhaber, G.R. (1989), Signalling by Underpricing in the IPO Market, Journal of Financial Economics, Vol. 23, pp. 303-323. Alvarez, S. and Gonzalez, V.M. (2005), Signalling and the Long-Run Performance of Spanish Initial Public Offerings (IPOs), Journal of Business, Finance and Accounting, Vol. 32 (1 & 2), pp. 323-348. Aggarwal, R. and Rivoli, P. (1990), Fads in the Initial Public Offering Market? Financial Management, Vol. 19, pp. 45-57. Aggarwal, R., Leal, R. and Hernandez, L. (1993), The Aftermarket Performance of Initial Public Offerings in Latin America, Financial Management, Vol. 22, pp. 42-53. Aussenegg, W. (1997), Short and Long-Run Performance of Initial Public Offerings in the Austrian Stock Market, Working Paper, Vienna University of Technology, Austria. Barber, B.M., and Lyon, J.D. (1997), Detecting LongRun Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics, Journal of Financial Economics, Vol. 43, pp. 341-372. Beatty, R. (1989), Auditor Reputation and the Pricing of Initial Public Offerings, The Accounting Review, Vol. 64, pp. 693-709. Beatty, R. and Ritter, J. (1986), Investment Banking, Reputation, and the Underpricing of Initial Public Offerings, Journal of Financial Economics, Vol. 15, pp. 213-232. Cai, J. and Wei, K. (1997), The Investment and Operating Performance of Japanese Initial Public Offerings, Pacific Basin Financial Journal, Vol. 5 (4), pp. 389-417. Chalk, A. J. and Peavy, J.W. III (1987), Initial Public Offerings: Daily Returns, Offering Types and the Price

Conclusion
The study reveals that for the Indian IPOs underpricing is very high and levels of subscription of IPOs, listing delay and age of IPO firms have been found to significantly explain underpricing. Underpricing is positively related to subscription, which is in line with the winners curse hypothesis and other independent variables though statistically insignificant, have the expected signs and also provide evidence of relationship between ex-ante uncertainty and underpricing. As for the determinants of long-run performance of IPOs, the initial return (except first year) has significant and negative effect on the after market returns. Listing delay affects the long-run performance over two years, however subscription variable and issue size only explain the

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Appendix
Table 1: International Evidence of Underpricing and Long-Run Performance of IPOs Country Australia Austria Brazil Canada Canada Chile China Denmark Finland France Germany Greece Hong Kong India India India India India India Japan Japan Korea New Zealand Singapore Spain Sweden Switzerland Thailand Tunisia Turkey U.K. U.K. U.S. U.S. U.S. Author(s) Lee, et al. (1994) Aussenegg (1997) Aggarwal, et al. (1993) Kooli and Suret (2003) Jog (1997) Aggarwal, et al. (1993) Chi and Padgett (2005) Jakobsen & Sorensen (2001) Keloharju (1993) Leleux and Muzyka (1997) Ljungqvist (1997) Kenourgios, et al. (2007) McGuinness (1993) Krishnamurti and Kumar (2002) Madhusoodan and Thiripalraju (1997) Pandey (2004) Singh and Mittal (2005) Ghosh (2005) Chaturvedi, et al. (2006) Cai and Wei (1997) Isobe, et al. (1998) Kim, et al. (1995) Firth (1997) Hin and Mahmood (1993) Alvarez and Gonzales (2005) Loughran, et al. (1994) Kunz and Aggarwal (1994) Wethyavivorn and Smith (1991) Naceur and Ghanem (2001) Durukan (2002) Levis (1993) Espenlaub, et al. (2000) Loughran (1993) Loughran and Ritter (1995) Ritter (1991) Period 1976-1989 1965-1993 1980-1990 1991-1998 1971-1992 1982-1990 1996-2000 1984-1992 1984-1989 1987-1991 1970-1990 1997-2002 1980-1990 1992-1993 1992-1995 1999-2002 1992-1996 1993-2001 1999-2005 1971-1990 1975-1989 1985-1988 1979-1987 1976-1984 1987-1997 1980-1990 1983-1989 1988-1989 1990-1999 1990-1997 1980-1988 1985-1992 1967-1987 1970-1990 1975-1984 Sample Size 266 57 62 445 130 28 668 76 79 56 145 169 72 98 1922 84 500 1842 50 172 240 99 143 45 37 162 42 32 40 173 712 588 3656 4753 1526 Initial Return (%) 11.9 6.5 78.5 16.3 129.2 9.2 52.7 35.3 75.21 83.22 95.86 28.91 40.76 35.8 58.1 17.69 14.61 14.3 Long-Run Return (%) -46.5 -27.3 -47.0 -16.86 -35.15 -23.7 -30.4* -21.1 -30.3 -12.1 -18.3 16.3 -.85 -65.5 -27.0 91.6 -10.00 -9.2 -27.8 1.2 -6.1 -21.74 -8.1 -21.3* -33.3 -20.0 -29.1

Source: Compiled from various studies. Note: Long-run returns represent performance over 3 years subsequent to issue. * Represents performance over 5 years subsequent to issue

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Footnotes
1

See Ibbotson (1975), Ritter (1984, 1987), Tinic (1988), Peavy (1990), Aggarwal et al., (1993), Levis (1993), Krishnamurti & Kumar (2002), Ljungqvist (1997), Madhusoodan et al., (1997), Singh and Mittal (2003), Ghosh (2005)
2

See Ibbotson and Jaffe (1975), Ritter (1984), Ibbotson et al., (1988)
3

Where, arit is the benchmark-adjusted return for stock i in the event month t, Rit is the raw return for firm i in the month t, and Rmt is the return of the BSEsensex. ARt is average benchmark adjusted return on a portfolio of n stocks for event month t and the cumulative benchmark-adjusted performance from event month t to event month s is the summation of the average benchmark-adjusted returns
5

See Ritter (1991), Aggarwal et al., (1993), Leleux (1993), Levis (1993), Loughran et al., (1994), Kim et al., (1995), Loughran and Ritter (1995), Pandey (2004), Singh and Mittal (2005)

See for example Ritter (1991) and Teoh, et al. (1998), who reported an adjusted R square of 7% and 6.37% respectively for three years subsequent to the IPO. Also, it is usual to obtain a low R square in crosssection regression because of diversity of crosssectional units. In fact, more than the value of R square, it is of greater relevance that the model is correctly specified, i.e. the regressors have correct (theoretically expected) signs and regression coefficients are statistically significant (Gujarati, 2004).

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