Transparency in IPO mechanism: Retail investors' participation, IPO pricing and returns

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2012-07-01T00:00:00Z

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Elsevier Science B.V., Amsterdam.

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0378-4266

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Suman Neupane and Sunil S. Poshakwale, Transparency in IPO mechanism: Retail investors' participation, IPO pricing and returns, Journal of Banking & Finance, Volume 36, Issue 7, July 2012, Pages 2064–2076

Abstract

Using data from the transparent Indian IPOsetting, the paper examines retail investors' participation, their influence on IPO pricing and the returns they make on IPO investment. The transparency in the mechanism, which allows investors to observe prior investors' participation,leads to demand which is concentrated at either one or two points of the offer price range. Analysis of investors' demand duringthe offer period shows that the participation of retail investors is significantly influenced by the participation of institutional investors. We examine IPO pricing and find thatfavourable demand by retail investors is positively associated with a high IPO priceeven after controlling for demand by institutional investors. Further, we find that due to aggressive bidding by overconfident investors, retail investors are, on average, unlikely to make positive allocation weighted initial returns even in a setting where they do not have to compete with institutional investors. Retail investors, however, can earn significant positive allocation weighted initial returns if they limit their participation in IPOs with above average institutional investors' demand.

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NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Banking & Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking & Finance, Volume 36, Issue 7, July 2012, Pages 2064–2076. http://dx.doi.org/10.1016/j.jbankfin.2012.03.010

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