Relationship of IPO Issue Price and Listing Day Returns with IPO Pricing Parameters
Keywords:
IPO Investment, pricing parameters, Offer price, Listing price, MAARAbstract
Initial Public Offer (IPO) is one of the means for companies to raise capital in the primary market. A company issues new securities for subscription by the public, in an IPO. An IPO helps a retail investor to acquire shares in an attractive company and broaden his investment portfolio. Hence it is necessary that the pricing of IPOs truly reflect the intrinsic value of the issuing company.
The IPO’s listed from 2003 to 2013 in Bombay Stock Exchange (BSE) was the sampling frame for the study. 75.24 % of the sampling frame (313 IPOs) was used for the analysis of research objectives. The share prices of Companies were taken from BSE Website (www.bseindia.com). The details of the Issuing Companies were obtained from SEBI Website (www.sebi.gov.in). Further details were collected from Prime Database and CMIE Prowess. The pricing parameters were selected as per SEBI guidelines. The under-pricing of IPOs is studied using Market Adjusted Abnormal Return (MAAR). A Causal Research design is used in the study. Regression analysis was used to study the impact of selected variables on Issue price and MAAR.
Approximately 58% of the IPOs in the study period were underpriced. For the sample IPOs, P/E Ratio, IPE, RoNW and NAV are significant predictors of Issue price. For overpriced IPOs, Beta estimates indicated that P/E Ratio, RoNW and NAV are significant predictors of Issue price. For under-priced IPOs, Beta estimates indicated that IPE, RoNW and NAV are significant predictors of Issue price. The pricing parameters were not found to be the significant predictors for MAAR.
The results obtained from the study provide important information to investors intending to invest in IPO’s for a short term.
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