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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26443
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| Title: | Group Affiliation and the Performance of Initial Public Offerings in the
Indian Stock Market |
| Authors: | Marisetty, Vijaya B
Subrahmanyam, Marti G |
| Keywords: | Initial Public Offering (IPO)
underpricing Indian business groups |
| Issue Date: | Nov-2005 |
| Series/Report no.: | FIN-05-038 |
| Abstract: | We document the effects of group affiliation on the initial performance
of the 2,713 Initial Public Offerings (IPOs) made in India under three
different regulatory regimes during the period 1990-2004. We distinguish
between two competing hypotheses regarding the effect of group
affiliation on a firm’s initial performance in the stock market:
the certification hypothesis according to which group membership is a
positive signal of firm quality, and the “tunneling”
hypothesis, under which group membership affords more opportunities for
the controlling shareholders to misappropriate the firm’s
resources, and is thus, a negative signal of firm quality. Our results
show that the average underpricing of group companies is higher than
that of stand-alone companies. In particular, the underpricing is high
for companies affiliated to private foreign and private Indian groups.
The evidence in support of the certification hypothesis is reinforced
when we test the ex post performance of all IPOs: we find that, over
time, group-affiliated companies have a higher probability of survival
and success than their stand-alone counterparts. Groups appear to
support their affiliates to maintain their reputation in the eyes of
investors. However, the long-term stock market performance of firms in
all categories is negative or insignificantly different from zero.
Further, the long-term performance of group companies is somewhat worse
than their stand-alone counterparts. We conclude that the higher
underpricing of IPOs of group affiliated companies is due to investor
overreaction, and may be the result of strategic behavior on the part of
the groups to eliminate competition from lower quality issues. |
| URI: | http://hdl.handle.net/2451/26443 |
| Appears in Collections: | Finance Working Papers
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