Kavita Wadhwa and Sudhakara Reddy Syamala
The purpose of this paper is to examine the impact of market timing and pseudo market timing on equity issuance decisions of IPOs in an emerging economy – India. Indian new issues…
Abstract
Purpose
The purpose of this paper is to examine the impact of market timing and pseudo market timing on equity issuance decisions of IPOs in an emerging economy – India. Indian new issues market provides a perfect setting to test market timing against pseudo market timing due to two reasons. First, the US literature shows that most underpriced IPOs are highly overvalued and in India, the authors have the evidence of underpricing of IPOs. But whether Indian IPOs are overvalued or not it is yet to be tested. Second, majority of IPOs were issued in India only after the 1991 economic reforms which may signal the evidence for pseudo market timing hypothesis.
Design/methodology/approach
The authors use direct test to examine the impact of market timing and pseudo market timing variables on the IPO activity. The direct tests of market timing and pseudo market timing hypotheses are based on the positive relation of market timing variables and market conditions variables with IPO activity. The authors examine the long-run performance of IPOs by using the calendar-time regression approach to test market timing against pseudo market timing. This serves as indirect test of market timing and pseudo market timing. Evidence of market timing using indirect test shows that there is a decline in the long-run stock performance of IPOs.
Findings
The results show that in India, firms issue equity not just due to market conditions but they also issue equity in order to time the market. The results of market timing are also supported by the calendar-time approach results. However, the authors find that the evidence of market timing is stronger for hot issue markets as compared to cold issue markets.
Originality/value
This is the first study to comprehensively examine market timing and pseudo market timing using direct and indirect tests for an emerging market context.
Details
Keywords
Kavita Wadhwa and Sudhakara Reddy Syamala
The purpose of this paper is to study the reallocation of initial public offering (IPO) shares to retail investors, non-institutional buyers (NIBs) and qualified institutional…
Abstract
Purpose
The purpose of this paper is to study the reallocation of initial public offering (IPO) shares to retail investors, non-institutional buyers (NIBs) and qualified institutional buyers (QIBs). The authors examine how the reallocation process is related to the pricing decision of the underwriter. The authors also examine the long-run performance of the IPOs classified on the basis of the highest reallocation by retail investors, NIBs and QIBs.
Design/methodology/approach
The authors use regression analysis as well as 2SLS and three-stage least squares models to test the hypotheses. For long-run performance analysis, the authors adopt Carhart’s (1997) four-factor model.
Findings
First, the authors provide evidence that the reallocation of IPO shares for retail investors, NIBs and QIBs is frequent. Second, all three categories of investors are treated differently in the reallocation of underpriced shares. Third, the authors find that the reallocation and pricing strategies are interdependent and both the strategies are used by the underwriter to reward and favor retail investors for showing high level of demand. The authors find that in India, underwriters reward retail investors. Lastly, even though underwriters favor retail investors for reallocation, the authors find that IPOs which receive highest reallocation to retail investors perform poorly in the long run.
Originality/value
This paper is the first paper to show evidence of reallocation of IPO shares by underwriters for an emerging market. The paper is different from other papers as the regulatory regime present in the Indian markets is different from other markets.