Ashish Kumar Vidyarthi Long Term Performance of Indian IPOs Finance Thesis

Long Term Performance of IPO
MSc Finance and Management 2009-2010 MSc Thesis
Long term Performance of IPOs The Indian Case

Supervisor Dr. Sunil S Poshakwale
By, Ashish Kumar Vidyarthi Batch of 2009-2010 Cranfield School of Management
Cranfield University 2010. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright owner.
Copyright - Ashish Kumar Vidyarthi
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CRANFIELD UNIVERSITY
CRANFIELD SCHOOL OF MANAGEMENT
MSc FINANCE & MANAGEMENT
Academic Year 2009-2010
Ashish Kumar Vidyarthi
Long Term Performance of IPOs Stocks The Indian Case
Supervisor Dr. Sunil S Poshakwale

This Thesis is submitted in part fulfilment of the requirements for the degree of Master of Science
September 2010
Copyright - Ashish Kumar Vidyarthi Page 2
Abstract:
This thesis focuses on determining the long term performance of the IPO stocks listed on the Indian stock market. It empirically examines the relation of the long term performance with listing day returns, short term performance and the risk adjusted returns.
The parameters used for the study are IPOs characteristics like date of issue, date of listing and book runner information. It also uses essential financial details like stock price, Indian risk free rate and the Nifty index value. These details are the daily returns during the study period 19992007. All the IPOs listed over any of the Indian stock exchange during the period 1999-2007 are included in the study. A total of 241 IPOs were analysed during the study. The abnormal return and the risk adjusted returns were also computed using the CAPM framework, BHAR- event study and Sharpe Ratio.
The findings of this thesis are in line with the pervious findings. The IPOs show high level of under pricing which results in high initial return, however the abnormal returns shrink over time and the IPOs underperform over a long term horizon. The trend of under pricing and underperformance are similar to the findings of the developed nations.
Keywords:
Long Term Performance, Indian IPO, Event Study - BHAR, Abnormal Returns - CAPM, Risk Adjusted Returns Sharpe Ratio, IPO underperformance, IPO initial under pricing.
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Table of Contents
Abstract: .......................................................................................................................................... 3 Keywords: ................................................................................................................................... 3 Acknowledgment: ..........................................................................Error! Bookmark not defined. Chapter 1 - Introduction: ................................................................Error! Bookmark not defined. 1.1 1.2 Initial Public Offering: ...................................................Error! Bookmark not defined. IPO Listing Process in Detail:........................................Error! Bookmark not defined.
Listing Process in India:.........................................................Error! Bookmark not defined. 1.3 Importance of Measuring Long Term Performance- India: ......... Error! Bookmark not
defined. Chapter 2 - Review of relevant literature:......................................Error! Bookmark not defined. 2.1 Underperformance: ..............................................................Error! Bookmark not defined. 2.2 Underwriter Reputation: ......................................................Error! Bookmark not defined. 2.3 Divergence of opinion: ........................................................Error! Bookmark not defined. 2.4 Dilution of the original share: ..............................................Error! Bookmark not defined. 2.5 Under-pricing: ......................................................................Error! Bookmark not defined. 2.6 Size and age of the Issuer: ...................................................Error! Bookmark not defined. 2.7 Quality and Strategic Factors Influencing Long Term Performance: Error! Bookmark not defined. Chapter 3 - Research Data: ............................................................Error! Bookmark not defined. 3.1 Data Source: .........................................................................Error! Bookmark not defined. 3.2 Missing data: ........................................................................Error! Bookmark not defined. 3.3 IPO Descriptive Summary Statistics:...................................Error! Bookmark not defined. Chapter 4 - Research Methodology: ..............................................Error! Bookmark not defined. 4.1 Unit Root and Co-Integration Test: .....................................Error! Bookmark not defined. Unit Root test: ........................................................................Error! Bookmark not defined. Co-Integration test: ................................................................Error! Bookmark not defined. 4.2 Benchmarking and Risk Free Rate: .....................................Error! Bookmark not defined. Benchmark: ............................................................................Error! Bookmark not defined. Risk Free Rate: .......................................................................Error! Bookmark not defined. 4.3 Under-pricing and Initial Returns: .......................................Error! Bookmark not defined. Importance of Ri.....................................................................Error! Bookmark not defined.
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Long Term Performance of IPO 4.4 Long Term Abnormal Returns using CAPM: ......................Error! Bookmark not defined. 4.5 Abnormal Returns using Event Study: ................................Error! Bookmark not defined. Cumulative Abnormal Returns (CAR) vs. Buy and Hold Abnormal Returns (BHAR):Error! Bookmark not defined. 4.6 Risk Adjusted Returns: ........................................................Error! Bookmark not defined. 4.7 Check for Persistence:..........................................................Error! Bookmark not defined. Pearsons Correlation: ............................................................Error! Bookmark not defined. Chapter 5 - Results and Discussions: .............................................Error! Bookmark not defined. 5.1 Unit Root test and co-integration test: .................................Error! Bookmark not defined. 5.2 Test for Heteroscedasticity and Autocorrelation: ................Error! Bookmark not defined. 5.3 Under pricing and Initial Returns: .......................................Error! Bookmark not defined. 5.4 Abnormal returns over 3 years period - CAPM: ..................Error! Bookmark not defined. 5.5 Abnormal Returns using BHAR: .........................................Error! Bookmark not defined. 5.6 Sharpe Ratio: ........................................................................Error! Bookmark not defined. 5.7 Persistence: ..........................................................................Error! Bookmark not defined. Chapter 6 - Summary and Conclusion: ..........................................Error! Bookmark not defined. Chapter 7 - Limitations and Recommendations: ...........................Error! Bookmark not defined. Benchmark: ................................................................................Error! Bookmark not defined. Time Frame: ...............................................................................Error! Bookmark not defined. Multifactor Regression Model: ..................................................Error! Bookmark not defined. Other Frameworks: ....................................................................Error! Bookmark not defined. References ....................................................................................................................................... 8 Bibliography ............................................................................................................................... 8 Work Cited:................................................................................................................................. 9 List of Appendix: ...........................................................................Error! Bookmark not defined. Appendix A: ...............................................................................Error! Bookmark not defined. Appendix B: ...............................................................................Error! Bookmark not defined. Appendix C: ...............................................................................Error! Bookmark not defined. Appendix D: ...............................................................................Error! Bookmark not defined.
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List of Figures:
Figure 1 - Kind of Issue .................................................................Error! Bookmark not defined. Figure 2- IPO Process ....................................................................Error! Bookmark not defined. Figure 3 - Book building and Fixed Method Process ....................Error! Bookmark not defined. Figure 4 - Global IPOs Regional Comparison ...............................Error! Bookmark not defined. Figure 5 - Emerging Markets IPOs Volume-Number....................Error! Bookmark not defined. Figure 6 - Services of an Investment Bank (Underwriter) .............Error! Bookmark not defined. Figure 7 - Blue Print of Long Term Performance..........................Error! Bookmark not defined. Figure 8 - Year wise break-up of the sampled IPOs (NSE and BSE).......... Error! Bookmark not defined. Figure 9 - Capital Asset Pricing Model .........................................Error! Bookmark not defined. Figure 10 - Output plot for Autocorrelation: .................................Error! Bookmark not defined. Figure 11 - Output plot for Heteroscedasticity ..............................Error! Bookmark not defined. Figure 12 - CAPM - 3 Years abnormal returns..............................Error! Bookmark not defined. Figure 13 - BHAR - 3 Years abnormal returns ..............................Error! Bookmark not defined. Figure 14 - BHAR Short term abnormal returns ...........................Error! Bookmark not defined. Figure 15 - Risk Adjusted Returns Sharpe Ratio Curve ................Error! Bookmark not defined. Figure 16 - Abnormal Returns CAPM ...........................................Error! Bookmark not defined.
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List of Tables:
Table 1 - Initial returns of various countries ..................................Error! Bookmark not defined. Table 2 - The number of Public issues and the amount raised in the Indian primary market Error! Bookmark not defined. Table 3 - SEBI Registered Market Intermediaries .........................Error! Bookmark not defined. Table 4 - Descriptive Summary of Data ........................................Error! Bookmark not defined. Table 5 - Initial Returns .................................................................Error! Bookmark not defined. Table 6 - Abnormal Returns - CAPM ............................................Error! Bookmark not defined. Table 7 - Abnormal Returns - BHAR ............................................Error! Bookmark not defined. Table 8 - Pearsons correlation ......................................................Error! Bookmark not defined. Table 9- Unit Root and Co-Integration Test ..................................Error! Bookmark not defined. Table 10 - Abnormal Return_Standard Error ................................Error! Bookmark not defined.
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References
Bibliography
Geddes, R. (July 23, 2003). IPOs and Equity Offerings (Securities Institute Global Capital Markets) . Jersey City, NJ: Butterworth-Heinemann; 1st edition . Lipman, F. D. (December 31, 2008). International and US IPO Planning: A Business Strategy Guide. NYU: Wiley. Smith, D. (February 20, 2003). Zero-to-IPO. Cambridge Manhattan Group. Young, E. &. (October 8, 1999). The Ernst & Young Guide to the IPO Value Journey . London: Wiley; 1 edition.
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Work Cited:
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Long Term Performance of IPO Carter, R. B., Dark, F. H. and Singh, A. K. (1998), "Underwriter reputation, initial returns, and the long-run performance of IPO stocks", The Journal of Finance, vol. 53, no. 1, pp. 285311. Chopra, R. I. and Bhanot, R. K. "Price Performance of IPOs in Indian Stock Market", . Diether, K. (2002), "B., Christopher J. Malloy, and Anna Scherbina, 2002, Difference of opinion and the cross section of stock returns", Journal of Finance, vol. 57, pp. 2113-2141. Dubois, M., Jeanneret, P., Investments, M. and de l'Hopital, F. "The long-run performance of seasoned equity offerings with rights: evidence from the Swiss market", . Engle, R. F. and Granger, C. W. J. (1991), Long-run economic relationships: Readings in cointegration, Oxford University Press, USA. Fama, E. F. (1998), "Market efficiency, long-term returns, and behavioral finance1", Journal of Financial Economics, vol. 49, no. 3, pp. 283-306. Field, L. C. (1995), "Is institutional investment in initial public offerings related to long-run performance of these firms?", . Gao, Y., Mao, C. X. and Zhong, R. (2006), "Divergence of opinion and long-term performance of initial public offerings", Journal of Financial Research, vol. 29, no. 1, pp. 113-129. Geroski, P. A. and Jacquemin, A. (1988), "The persistence of profits: a European comparison", The economic journal, vol. 98, no. 391, pp. 375-389. Gompers, P. A. and Lerner, J. (2003), "The really long-run performance of initial public offerings: The pre-Nasdaq evidence", The journal of finance, vol. 58, no. 4, pp. 1355-1392. Green, D. H., Barclay, D. W. and Ryans, A. B. (1995), "Entry strategy and long-term performance: conceptualization and empirical examination", The Journal of Marketing, vol. 59, no. 4, pp. 1-16. Guimares, R. M. C., Kingsman, B. G. and Taylor, S. J. (1989), A reappraisal of the efficiency of financial markets, Springer Berlin. Habib, M. A. and Ljungqvist, A. P. (1998), "Underpricing and IPO proceeds: A Note", Economics Letters, vol. 61, no. 3, pp. 381-383. Houge, T., Loughran, T., Suchanek, G. and Yan, X. (2001), "Divergence of opinion, uncertainty, and the quality of initial public offerings", Financial Management, vol. 30, no. 4, pp. 5-23. Ikenberry, D., Lakonishok, J. and Vermaelen, T. (1995), "Market underreaction to open market share repurchases* 1", Journal of Financial Economics, vol. 39, no. 2-3, pp. 181-208.
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Long Term Performance of IPO Ittner, C. D., Lambert, R. A. and Larcker, D. F. (2003), "The structure and performance consequences of equity grants to employees of new economy firms* 1", Journal of Accounting and Economics, vol. 34, no. 1-3, pp. 89-127. Keloharju, M. (1993), "The winner's curse, legal liability, and the long-run price performance of initial public offerings in Finland* 1", Journal of Financial Economics, vol. 34, no. 2, pp. 251-277. Khurshed, A., Mudambi, R. and Goergen, M. (1999), "On the long-run performance of IPOs", On the long-run performance of IPOs, . Kim, J. B., Krinsky, I. and Lee, J. (1995), "The aftermarket performance of initial public offerings in Korea* 1", Pacific-Basin Finance Journal, vol. 3, no. 4, pp. 429-448. Kothari, S. P. and Warner, J. B. (1997), "Measuring long-horizon security price performance", Journal of Financial Economics, vol. 43, no. 3, pp. 301-339. Krigman, L., Shaw, W. H. and Womack, K. L. (2001), "Why do firms switch underwriters?* 1", Journal of Financial Economics, vol. 60, no. 2-3, pp. 245-284. Krigman, L., Shaw, W. H. and Womack, K. L. (1999), "The persistence of IPO mispricing and the predictive power of flipping", The Journal of Finance, vol. 54, no. 3, pp. 1015-1044. Krishnamurti, C. and Kumar, P. (2002), "The initial listing performance of Indian IPOs", Managerial Finance, vol. 28, no. 2, pp. 39-51. Kunz, R. M. and Aggarwal, R. (1994), "Why initial public offerings are underpriced: Evidence from Switzerland", Journal of banking & finance, vol. 18, no. 4, pp. 705-723. Lee, P. J., Taylor, S. L. and Walter, T. S. (1996), "Australian IPO pricing in the short and long run", Journal of Banking & Finance, vol. 20, no. 7, pp. 1189-1210. Levis, M. (1993), "The long-run performance of initial public offerings: The UK experience 1980-1988", Financial Management, vol. 22, no. 1, pp. 28-41. Lieberman, M. B. and Montgomery, D. B. (1988), "First-mover advantages", Strategic Management Journal, vol. 9, no. S1, pp. 41-58. Ljungqvist, A., Nanda, V. and Singh, R. (2006), "Hot Markets, Investor Sentiment, and IPO Pricing*", The Journal of Business, vol. 79, no. 4. Logue, D. E. (2009), "On the pricing of unseasoned equity issues: 19651969", Journal of Financial and Quantitative Analysis, vol. 8, no. 01, pp. 91-103. Loughran, T. and Ritter, J. R. (1995), "The new issues puzzle", Journal of Finance, vol. 50, no. 1, pp. 23-51.
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Long Term Performance of IPO Loughran, T., Ritter, J. R. and Rydqvist, K. (1994), "Initial public offerings: International insights* 1", Pacific-Basin Finance Journal, vol. 2, no. 2-3, pp. 165-199. Lyon, J. D., Barber, B. M. and Tsai, C. L. (1999), "Improved methods for tests of long-run abnormal stock returns", The Journal of Finance, vol. 54, no. 1, pp. 165-201. Machin, S. and Van Reenen, J. (1993), "Profit margins and the business cycle: evidence from UK manufacturing firms", The journal of industrial economics, , pp. 29-50. Maksimovic, V. and Unal, H. (1993), "Issue size choice and" underpricing" in thrift mutual-tostock conversions", Journal of Finance, vol. 48, no. 5, pp. 1659-1692. Mauer, D. C. and Senbet, L. W. (2009), "The effect of the secondary market on the pricing of initial public offerings: Theory and evidence", Journal of Financial and Quantitative Analysis, vol. 27, no. 01, pp. 55-79. Michaely, R. and Shaw, W. H. (1994), "The pricing of initial public offerings: Tests of adverseselection and signaling theories", Review of Financial Studies, vol. 7, no. 2, pp. 279-319. Miller, E. M. (1977), "Risk, uncertainty, and divergence of opinion", Journal of Finance, , pp. 1151-1168. Mohamed, S., Nasir, A. M. and Ariff, M. (1994), "Analysis of underpricing in the Malaysian new issues market during 19751990: Are new issues excessively underpriced", Capital Markets Review, vol. 2, no. 2, pp. 1727. Paudyal, K., Saadouni, B. and Briston, R. J. (1998), "Privatisation initial public offerings in Malaysia: Initial premium and long-term performance", Pacific-Basin Finance Journal, vol. 6, no. 5, pp. 427-451. Pelez, O., Guzmn, M. G., Kour, G., Prez, R., San Martn, J. L., Vzquez, S., Rosario, D., Mora, R., Quintana, I. and Bisset, J. (2004), "Dengue 3 epidemic, Havana, 2001", Emerging Infectious Diseases, vol. 10, no. 4, pp. 719-722. Perotti, E. C. and Guney, S. E. (1993), "The structure of privatization plans", Financial Management, vol. 22, no. 1, pp. 84-98. Pilbeam, S. and Corbridge, M. (2002), People resourcing: HRM in practice, Financial Times/Prentice Hall. Pukthuanthong, K., Roll, R. and Walker, T. (2007), "How employee stock options and executive equity ownership affect long-term IPO operating performance", Journal of Corporate Finance, vol. 13, no. 5, pp. 695-720. Rajan, R. and Servaes, H. (1997), "Analyst following of initial public offerings", Journal of Finance, vol. 52, no. 2, pp. 507-529.
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Long Term Performance of IPO

MSc Finance and Management 2009-2010 MSc Thesis

Long term Performance of IPOs The Indian Case

Copyright - Ashish Kumar Vidyarthi

Long Term Performance of IPO

CRANFIELD SCHOOL OF MANAGEMENT

MSc FINANCE & MANAGEMENT

Academic Year 2009-2010