Article : A Probability Approach To Modelling Long-run Underperformance Of Indian IPOs: A Mispricing Lesson For Investors

Title

A Probability Approach To Modelling Long-run Underperformance Of Indian IPOs: A Mispricing Lesson For Investors

Author

Tapas Das, Seshanwita Das, Dr. Rajiv Upadhyaya

In this empirical study, we try to analyse the factors that affect IPO underperformance. In other words, we try to model the long-run underperformance of IPOs in the Indian capital market through probability approaches, such as Logit and Probit models. Results suggest that even if under pricing or listing gain is there in an IPO because of market sentiment, IPO euphoria and initial marketing hype, but in the long-run IPO may face vicious underperformance, resulting in huge losses for the investors. Therefore, based on the results of this study, it is suggested that IPO investors, at the time of issuance and listing, should invest in all those IPOs which are graded high by credit rating agencies, which are fairly highly levered, which are preferably not issued by high group affiliated units and which belong to established age-old industry having strong fundamentals, rather than sunrise or so-called promising industry. It has also become clear from our study that if IPO investors, who generally prefer to avoid short-term capital gains tax (STCG), should immediately sell those IPOs off, which after being traded in the stock exchange for at least a year, pay high dividend and enjoy high PE ratio, high trading volume and low market capitalisation, for these IPOs have the higher chances of underperformance and unproductive lock-in.

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