Impact of IPO pricing mechanisms on short and long-run returns in India: An empirical study

Abstract

This study explores the extent of underpricing amongst IPOs issued using either fixed-price or bookbuilt pricing mechanism, as well as their long-run performance over a span of 3 years (36 time-periods of 21 consecutive trading days). IPOs listed on the National Stock Exchange in India during the period April-1999 until March-2014 (15 financial years) were considered for analysis using a sample of 291 IPOs for the short-run and 284 IPOs for the long-run study. The sample excludes Small and Medium Enterprise IPOs as well as any Follow-Up Public Offerings. Marginally Adjusted Return on Opening (MAARO) are used as a measure of performance to determine the extent of short-run underpricing. Average Buy-Hold-Abnormal-Return (ABHAR), as well as Wealth Relatives (WR), is used to study long-run performance. Our results of short-run performance reveal that market feedback hypothesis plays a role in reducing the level of underpricing in bookbuilt issues. The extent of underpricing for bookbuilt issues is much smaller than fixed-price IPO issues and the difference is statistically significant. Our results from an IPO long-run performance standpoint is indifferent in regards to the pricing mechanism used with either returning losses. Our findings on long-run performance reveal that bookbuilt IPOs exhibit no statistically significant abnormal returns while fixed- price IPO issues do so for a few months in the study.