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 CaseSupervisor – Dr. Sunil S Poshakwale

By,Ashish Kumar Vidyarthi

Batch of 2009-2010Cranfield School of Management

© Cranfield University 2010. All rights reserved. No part of this publication may be reproduced withoutthe written permission of the copyright owner.

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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



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 1999-

2007. 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.



Table of Contents

Abstract:...........................................................................................................................................3

Keywords:....................................................................................................................................3

Acknowledgment:............................................................................................................................4

Chapter 1 - Introduction:.................................................................................................................9

1.1 Initial Public Offering:...................................................................................................10

1.2 IPO Listing Process in Detail:.......................................................................................12

Listing Process in India:........................................................................................................12

1.3 Importance of Measuring Long Term Performance- India:..........................................14

Chapter 2 - Review of relevant literature:.....................................................................................16

2.1 Underperformance:..............................................................................................................16

2.2 Underwriter Reputation:......................................................................................................17

2.3 Divergence of opinion:........................................................................................................19

2.4 Dilution of the original share:..............................................................................................20

2.5 Under-pricing:......................................................................................................................21

2.6 Size and age of the Issuer:...................................................................................................24

2.7 Quality and Strategic Factors Influencing Long Term Performance:.................................25

Chapter 3 - Research Data:............................................................................................................26

3.1 Data Source:.........................................................................................................................26

3.2 Missing data:........................................................................................................................28

3.3 IPO Descriptive Summary Statistics:..................................................................................28

Chapter 4 - Research Methodology:..............................................................................................29

4.1 Unit Root and Co-Integration Test:.....................................................................................29

Unit Root test:........................................................................................................................29

Co-Integration test:................................................................................................................29

4.2 Benchmarking and Risk Free Rate:.....................................................................................30

Benchmark:............................................................................................................................30

Risk Free Rate:......................................................................................................................30

4.3 Under-pricing and Initial Returns:.......................................................................................30

Importance of Ri....................................................................................................................30

4.4 Long Term Abnormal Returns using CAPM:.....................................................................31

4.5 Abnormal Returns using Event Study:................................................................................32



Cumulative Abnormal Returns (CAR) vs. Buy and Hold Abnormal Returns (BHAR):.......32

4.6 Risk Adjusted Returns:........................................................................................................33

4.7 Check for Persistence:.........................................................................................................34

Pearson’s Correlation:...........................................................................................................34

Chapter 5 - Results and Discussions:.............................................................................................35

5.1 Unit Root test and co-integration test:.................................................................................35

5.2 Test for Heteroscedasticity and Autocorrelation:................................................................35

5.3 Under pricing and Initial Returns:.......................................................................................37

5.4 Abnormal returns over 3 years period - CAPM:.................................................................38

5.5 Abnormal Returns using BHAR:.........................................................................................39

5.6 Sharpe Ratio:.......................................................................................................................41

5.7 Persistence:..........................................................................................................................42

Chapter 6 - Summary and Conclusion:..........................................................................................43

Chapter 7 - Limitations and Recommendations:...........................................................................44

Benchmark:................................................................................................................................44

Time Frame:...............................................................................................................................44

Multifactor Regression Model:..................................................................................................44

Other Frameworks:....................................................................................................................44

References......................................................................................................................................45

Bibliography..............................................................................................................................45

Work Cited:...............................................................................................................................46

List of Appendix:...........................................................................................................................51

Appendix A:...............................................................................................................................51

Appendix B:...............................................................................................................................52

Appendix C:...............................................................................................................................53

Appendix D:...............................................................................................................................54



List of Figures:

Figure 1 - Kind of Issue.................................................................................................................10

Figure 2- IPO Process....................................................................................................................11

Figure 3 - Book building and Fixed Method Process....................................................................13

Figure 4 - Global IPOs Regional Comparison...............................................................................14

Figure 5 - Emerging Markets IPOs Volume-Number...................................................................15

Figure 6 - Services of an Investment Bank (Underwriter)............................................................18

Figure 7 - Blue Print of Long Term Performance.........................................................................25

Figure 8 - Year wise break-up of the sampled IPOs (NSE and BSE)...........................................27

Figure 9 - Capital Asset Pricing Model.........................................................................................31

Figure 10 - Output plot for Autocorrelation:.................................................................................36

Figure 11 - Output plot for Heteroscedasticity..............................................................................36

Figure 12 - CAPM - 3 Years abnormal returns.............................................................................39

Figure 13 - BHAR - 3 Years abnormal returns..............................................................................40

Figure 14 - BHAR Short term abnormal returns...........................................................................41

Figure 15 - Risk Adjusted Returns Sharpe Ratio Curve................................................................41

Figure 16 - Abnormal Returns CAPM...........................................................................................52



List of Tables:

Table 1 - Initial returns of various countries.................................................................................23

Table 2 - The number of Public issues and the amount raised in the Indian primary market.......26

Table 3 - SEBI Registered Market Intermediaries........................................................................28

Table 4 - Descriptive Summary of Data........................................................................................28

Table 5 - Initial Returns.................................................................................................................38

Table 6 - Abnormal Returns - CAPM............................................................................................39

Table 7 - Abnormal Returns - BHAR............................................................................................40

Table 8 - Pearson’s correlation......................................................................................................42

Table 9- Unit Root and Co-Integration Test..................................................................................51

Table 10 - Abnormal Return_Standard Error................................................................................54



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Ashish Kumar Vidyarthi Long Term Performance of Indian IPOs Finance Thesis