Presence Of Underpricing With Context To Indian Companies Finance Essay

The aim of the survey is to look into which factors are doing under-pricing of Indian IPOs. Equally good as it gives a deep cognition of the Indian Stock market to the Author, as Writer purposes to hold its ain Investment house.


Firms frequently require raising capital in order to spread out their operations. One of the most popular ways for making it is by Initial Public Offering. Initial public offerings have history of initial first twenty-four hours additions which is besides called money left on the tabular array. If we

3 Hot issues with respects to IPO

1. Under pricing

2. The Hot Issue market

3. The long tally underperformance

Literature Review trades with the Hagiographas of the research subject which have been undertaken across the universe. It includes books, articles, and research documents.

Reasons for under pricing

1. Industry and Activity based categorization

2. Repute of Lead Directors

3. Informed institutional and uninformed single investors.


Literature Review

1. What is the old work already conducted on the same?

2. What are its failings and Strengths?

3. Objective or publish of your research?


The Term Under pricing refers to take down offered monetary value of an IPO so its listed monetary value. Now once we know what is under pricing so the concern comes is that why is under pricing done and what makes us believe that under pricing exists? What are the forces behind it and who is benefitted from it? Our full research revolves around these inquiries. Now our research state is India but does it exists in other portion of the World as good. Well different academic research workers have conducted a research around this Topic from clip to clip and have come up with different findings and theories. Most of the Academicians have found positive consequences with respects to IPO Underpricing. We will discourse the plants of these faculty members in item in following subdivision nevertheless I would wish to turn to the major findings of these authors with respects to the ground behind Underpricing.

Theories of underpricing can be grouped under four wide headers: asymmetric information, institutional, control, and behavioral. Asymmetrical information theoretical accounts assume that one of these parties knows more than the others, and that the ensuing informational clashs give rise to dumping in equilibrium. Institutional theories focus on three characteristics of the market place: judicial proceeding, banksi?? monetary value stabilising activities one time trading starts, and revenue enhancements. Control theories argue that dumping helps determine the

stockholder base so as to cut down intercession by outside stockholders once the company is public.

Finally, behavioral theories assume the presence of i??irrationali?? investors who bid up the monetary value of

IPO portions beyond true value. ( http: // % 2005-24-06.pdf ) Lines taken from Page 1 Abstract

Lot of literature already exists with respects to presence of Underpricing. Leti??s have a position on them one by one and discourse the inquiries unanswered by these theories or bing literature.

Baroni??s Model ( 1982 )

Leland and Pylei??s Model ( 1977 ) / Asymmetric Information Model: Leland and Pylei??s gave the construct of dissymmetry information with respects to IPOi??s. They suggested that quality and rating of a undertaking can be valued by value of portions retained by its on enterprisers. If a undertaking is of truly high value so enterprisers who have inside information about the undertaking will personally wish to put more in their ain undertakings and would maintain more portions with them. On the other manus enterprisers who know that their undertakings are of low quality would be less interested in retaining more portions with them. Thus rating of an IPO can be measured by the per centum of portions retained by its proprietors. If proprietors are retaining more per centum of portions with them so the undertaking tends to be of high quality and if undertaking is of low quality so proprietors will maintain a lesser per centum of portions with them.

Adverse Selection and Rocki??s Model of Winneri??s Curse Problem: Rocki??s theoretical account ( 1986 )

Information Acquisition: Benveniste and Spindti??s ( 1989 )

Prospect Theory: Loughran and Ritter ( 2003 )

Corruptness Hypothesis: Loughran and Ritter ( 2003 ) ,

Signing Hypothesis: Welch ( 1989 ) supported signalling theory of IPO underpricing. Harmonizing to it houses signal quality of IPO to less informed investors. This fact was supported by Allen and Faulhaber ( 1989 ) and Grinblatt and Hwang ( 1989 ) . They said that when information dissymmetries exist so investors are non able to separate between high quality houses and low quality houses. High quality houses so signal their quality at a cost excessively high which becomes hard for a low quality house to be replicated by dismissing the offering monetary value from market monetary value.

A Protection from Legal Liability

Models of Book Building: Shermani??s ( 2000 )

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Research Methodology

The Aim of this survey is to understand extent of Dumping which exist in Indian IPOi??s. We will discourse the methodological analysis which will be used to understand informations of given IPOi??s.

Aims of Study

Following are the aims which are kept in head before carry oning this survey.

1. Being of Regulatory model sing IPOi??s informations in India.

2. Presence of Dumping from day of the month of offer to day of the month of listing.

3. Analyzing the IPO public presentation in Short Run and in Long Run for period of 3 old ages.

4. Analyzing Factors set uping monetary value of IPOi??s.

Data and Methodology

Datas for the undermentioned research has been collected from NSE of India. Data is selected on below given standards: –

1. IPOi??s are listed in NSE at least before 3 old ages for short tally and long tally analysis of public presentation.

2. Data includes the undermentioned information: – Name of Organization, Offer Price, naming monetary value, Current Price and day of the month of offering and listing.

3. Short Run Analysis: IPOi??s from 1990 are included for survey and research. Entire figure of companies are… … … … …

4. Long Run analysis: IPOi??s from 1990- 2007 are used to mensurate public presentation and underpricing in long tally.

5. Factor act uponing monetary values of IPOi??s will be discussed to analyze public presentation of IPOi??s.

Consequences are computed to look into the existent value of the stock or its divergence from existent value. Underpricing will be reflected if consequences computed are positive on the other manus if consequences are negative so it reflects that portion are overvalued. Consequences will be analyzed for different clip periods from One hebdomad to 6 Calendar months.

IPO return is computed as the difference between the shutting monetary value and opening monetary value divided by the offer monetary value.

Where R_Return = Subscriberi??s initial return ( hereafter natural return )

P1= Closing monetary value on the first twenty-four hours of trading

P0= Offer Price

Following thing which needs to be observed is clip spread between application day of the month and listing day of the month. Generally Time Gap in India is rather big so it involves an chance cost. So we need to calculate it as per alterations in market. So the following equation would be

Where MAER is Market Adjusted Excess Return

M1= Closing Value of Market Index on First twenty-four hours of shutting

M0= Closing Value of Market Index on the Offer Shutting Date

Following thing comes is equation for look intoing monetary value for different clip periods from 1 hebdomad to 6 months so equation formed would be like this: –

Now R_Ret.t =Raw return of stock at clip T after naming twenty-four hours

Pt= Closing monetary value at the clip T

P0= Closing monetary value on Listing twenty-four hours

Similarly, the market adjusted extra returns are calculated for given clip period by the undermentioned expression


1. Age does non lend to monetary value public presentation in IPO.

2. Size of Issue does non impact pricing public presentation of IPO.

3. There is no relation between subscription degree and pricing information of IPO.

4. There is no relation between naming lead clip and pricing public presentation of IPO.

5. Long Run underpricing is more than short tally underpricing.


1. Allen, Franklin, and Gerald R. Faulhaber, “ Signing By Dumping in the IPO Market, ” Journal of Financial Economics, 23 ( 1989 ) , pp. 303-323

2. Grinblatt, Mark, and Chuan Yang Hwang, “ Signing and the Pricing of New Issues, ” Journal of Finance, 44 ( June 1989 ) , pp. 393-420.

3. Welch, Ivo, “ Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings, ” Journal of Finance, 44 ( June 1989 ) , pp. 421-449