Abstract:
In this doctoral thesis we bring together some empirical analysis on investors’ participation
in initial public offering (IPOs) from a market whose characteristics are unique and
significantly different from US and other important IPO markets. There are two important
features which distinguishes the Indian IPO market. First, the Indian IPO market is
characterised by a high level of transparency. Information on the participation of different
investor categories is publicly available during the offer period on a real time basis. Second,
Indian IPO firms are also required to reserve and allocate pre-determined fraction of total
shares on offer to different investor categories participating in the IPO.
Our first empirical study shows that the transparency in the mechanism creates highly
inelastic demand curves for a large number of IPOs. Analysis of demand over-time shows
that while institutional investors take the lead in subscribing to strong IPOs, noninstitutional
investors do so in weak IPOs, but perhaps not always with an honest intent.
Our analysis of IPO pricing shows that favourable demand by uninformed investors is
positively associated with a high IPO price. Further, while reputed underwriters appear to
exercise far more caution and restraint in setting prices, we find that in a large number of
IPOs, less reputed underwriters ignore information produced during the offer period and set
the price at the upper bound of the price range. Our findings suggest that the transparency
in allocation mechanism appears to be a double edged sword for the uninformed (retail)
investors. We recommend a change in the current regulation to protect investor’s welfare.
We also examine the influence of the participation of different investor categories on initial
returns. Unsurprisingly, we find that while the participation of both the informed investor
categories significantly influences initial returns, the participation of retail investor losses
its significance in explaining initial returns for bookbuilding and auction IPOs. We also
analyse the participation of informed institutional investors to examine whether the
presence of new bank loans at the time of the IPO reduces information asymmetry. Our
results show that presence of bank loans do not appear to reduce information asymmetry as
institutional investors participate significantly less in IPOs with new bank loans. While this
result is contrary to prior studies on bank loan announcements, it is consistent with a recent
study which shows that prior studies on bank loan announcements are plagued by sample
selection issues.
In our final empirical analysis we examine the participation of employees in IPOs and
analyse whether such participation can predict superior financial and operating performance
of the firm. We find that IPOs with high employee participation offer significantly higher
initial returns than IPOs with low employee participation. We also find that firms with high
employee participation in their IPOs exhibit superior post IPO operating performance.
Further, we find that the prior participation of other investor categories, in particular the
institutional investors, does not appear to influence the participation of employees in IPOs.
Our results suggest that employees have valuable private information about the quality of
the firm. The evidence presented in the study suggests that in the context of Indian IPOs,
where data on investors’ participation is available on a real time basis, uninformed
investors may use information on employee participation to select well performing IPOs.