A Study on Under Pricing and Long-Run Performance of Initial Public Offerings (IPO) in India : A Comparison between State Firms and Private Firms

Abstract

The study sought to examine the pricing and long term performance of IPOs of stale owned enterprises and compared it with the performance of privately owned enterprises The study was specifically motivated to find out whether there were differences in the underpricing and long run performance of privatization IPOs and private IPOs at the NSE. Secondary data on new issues was obtained from the NSL. The data was analyzed for abnormal returns and a statistical test was performed using the t- test to establish whether their existed significant difference in the level of underpricing and the three year long run cumulative abnormal returns. The results reveal that there seems to he a general tendency for privatizations to be underpriced to a greater degree than the private company IPOs. The average underpricing of privatization IPOs and private company IPOs was at 62.15% and 25.42% respectively. However, the difference in underpricing in initial mean returns is not statistically significant. In addition. Over the long run. three year alter listing, both the privatization and private IPOs underperformed the market. 1 hey both experienced negative three year cumulative abnormal returns with the private IPOs greatly underperforming with a CAR of negative 6% while privatizations had negative 32 %. Moth the privatization and private IPOs are very popular as they experienced massive oversubscription. I he high initial return on privatization IPOs may be as a result of deliberately chosen behaviour by the government as they pursue their political motives of wider stock ownership and political support for the privatization programme. The major implication o f this study is that for speculative investors both the private under privatization IPOs arc a good investment in the short run due to the incidence of high initial returns as a result of average underpricing. However, the privatizations IPOs fetch higher initial returns as compared to the private IPOs. The long run underperformances imply that investors should not hold on to their private and privatization IPOs for the long term as they are better off buying stock in the market and selling it w within the first month of trading.