Upload
gopinath-arumugam
View
452
Download
5
Embed Size (px)
Citation preview
A STUDY ON POST ISSUE PERFORMANCE OF INITIAL PUBLIC OFFERING (IPO’S)
IN THE INDIAN CAPITAL MARKET
By
GOPINATH.A
Reg No. 41909631032
Of
SRI SAI RAM ENGINEERING COLLEGE
A PROJECT REPORT
Submitted to the faculty of management studies
In partial fulfillment of the requirements
For the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
ANNA UNIVERSITY
JUNE-2011
ABSTRACT
The project work entitled “A Study on the Performance of Cement Industry in the Indian Capital Market”
is conducted in SHAREKHAN,Parry’s,Chennai to evaluate the performance of select cement industry in
Indian Capital Market.The cement industry which are listed are :
ACC LTD
AMBUJA CEMENTS
GRASIM
ULTRATECH
This study will give a basic idea about the financial performance of the cement industry in the
Indian Capital Market. This study finds out the volatility of each stock to identify the most consistent and
inconsistent stock.
For this study 5 years data is used. The data is taken from the balance sheet of the companies. Using
the data, ratio analysis was performed to find out the financial performance of the companies. Using
standard deviation and Beta value, the volatility of the stocks can be identified. Analyzing the price
movements, the price fluctuation and market movement of each stock is identified.
Major findings are reported at the end of the project .On the basis of findings suitable suggestions
have been made to the investors.
.
CHAPTER – I
INTRODUCTION
1.1 INTRODUCTION INDUSTRY PROFILE
INITIAL PUBLIC OFFERING (IPO)
The first public offering of equity shares or convertible securities by a company, which is
followed by the listing of a company’s shares on a stock exchange, is known as an ‘Initial
Public Offering’. In other words, it refers to the first sale of a company’s common shares to
investors on a public stock exchange, with an intention to raise new capital. The most important
objective of an IPO is to raise capital for the company. It helps a company to tap a wide range of
investors who would provide large volumes of capital to the company for future growth and
development. A company going for an IPO stands to make a lot of money from the sale of its
shares which it tries to anticipate how to use for further expansion and development. The
company is not required to repay the capital and the new shareholders get a right to future profits
distributed by the company.
Companies fall into two broad categories: Private and Public .
A privately held company has fewer shareholders and its owners don't have to disclose
much information about the company. When a privately held corporation needs additional
capital, it can borrow cash or sell stock to raise needed funds. Often "going public" is the best
choice for a growing business. Compared to the costs of borrowing large sums of money for ten
years or more, the costs of an initial public offering are small. The capital raised never has to be
repaid. When a company sells its stock publicly, there is also the possibility for appreciation of
the share price due to market factors not directly related to the company.
Why go public??
Before deciding whether one should complete an IPO, it is important to consider the
positive and negative effects that going public may have on their mind. Typically, companies go
public to raise and to provide liquidity for their shareholders. But there can be other benefits.
Going public raises cash and usually a lot of it. Being publicly traded also opens many financial
doors:
Because of the increased scrutiny, public companies can usually get better rates when they
issue debt.
As long as there is market demand, a public company can always issue more stock.
Thus ,mergers and acquisitions are easier to do because stock can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to implement things like
employee stock ownership plans, which help to attract top talent.
Going public can also boost a company’s reputation which in turn, can help the company to
expand in the marketplace.
SIGNIFICANCE OF IPO
Investing in IPO has its own set of advantages and disadvantages. Where on one hand, high
element of risk is involved, if successful, it can even result in a higher rate of return. The rule is:
Higher the risk, higher the returns.The company issues an IPO with its own set of management
objectives and the investor looks for investment keeping in mind his own objectives. Both have a
lot of risk involved. But then investment also comes with an advantage for both the company and
the investors. The significance of investing in IPO can be studied from 2 viewpoints – for the
company and for the investors. This is discussed in detail as follows:
SIGNIFICANCE TO THE COMPANY:
When a privately held corporation needs additional capital, it can borrow cash or sell
stock to raise needed funds. Or else, it may decide to “go public”. "Going Public" is the best
choice for a
growing business for the following reasons:
The costs of an initial public offering are small as compared to the costs of borrowing large
sums of money for ten years or more,
The capital raised never has to be repaid.
When a company sells its stock publicly, there is also the possibility for appreciation of the
share price due to market factors not directly related to the company.
It allows a company to tap a wide pool of investors to provide it with large volumes of
capital for future growth.
SIGNIFICANCE TO THE SHAREHOLDERS:
The investors often see IPO as an easy way to make money. One of the most attractive
features of an IPO is that the shares offered are usually priced very low and the company’s stock
prices can increase significantly during the day the shares are offered. This is seen as a good
opportunity by ‘speculative investors’ looking to notch out some short-term profit. The
‘speculative investors’ are interested only in the short-term potential rather than long-term gains.
THE RISK FACTORInvesting in IPO is often seen as an easy way of investing, but it is highly risky and many
Investment advisers advise against it unless you are particularly experienced and knowledgeable.
The risk factor can be attributed to the following reasons:
Unpredictable.
No past track record of the company.
Potential of stock market.
.
RISK ASSESSMENT:
The possibility of buying stock in a promising start-up company and finding the next success
story has intrigued many investors. basic risks and potential rewards associated with investing in
an IPO. This has made Risk Assessment an important part of Investment Analysis. Higher the
desired returns, higher would be the risk involved. Therefore, a thorough analysis of risk
associated with the investment should be done before any consideration.
There are 3 kinds of risks involved in investing in IPO:
Business risk :
It is important to note whether the company has sound business and management policies, which
are consistent with the standard norms. Researching business risk involves examining the
business model of the company.
Financial risk:
Is this company solvent with sufficient capital to suffer short-term business setbacks? The
liquidity position of the company also needs to be considered. Researching financial risk
involves examining the corporation's financial statements, capital structure, and other
financial data.
Market risk:
It would beneficial to check out the demand for the IPO in the market, i.e., the appeal of
the IPO to other investors in the market. Hence, researching market risk involves examining the
appeal of the corporation to current and future market conditions.
IPO INVESTMENT STRATEGIES:
Investing in IPOs is much different than investing in seasoned stocks. This is because there is
limited information and research on IPOs, prior to the offering. And immediately following the
offering, research opinions emanating from the underwriters are invariably positive.
There are some of the strategies that can be considered before investing in the IPO:
Understand the working of IPO:
The first and foremost step is to understand the working of an IPO and the basics of an
investment process. Other investment options could also be considered depending upon
the objective of the investor.
Gather knowledge:
It would be beneficial to gather as much knowledge as possible about the IPO market, the
company offering it, the demand for it and any offer being planned by a competitor.
Investigate before investing:
The prospectus of the company can serve as a good option for finding all the details of
the company. It gives out the objectives and principles of the management and will also
cover the risks.
Know your broker:
This is a crucial step as the broker would be the one who would majorly handle your
money. IPO allocations are controlled by underwriters. The first step to getting IPO
allocations is getting a broker who underwrites a lot of deals.
Measure the risk involved:
IPO investments have a high degree of risk involved. It is therefore, essential to measure
the risks and take the decision accordingly.
Invest at your own risk:
Finally, after the homework is done, and the big step needs to be taken. All that can be
suggested is to ‘invest at your own risk’. Do not take a risk greater than your capacity.
PRICING OF AN IPO:
The pricing of an IPO is a very critical aspect and has a direct impact on the success or failure of
the IPO issue. There are many factors that need to be considered while pricing an IPO and an
attempt should be made to reach an IPO price that is low enough to generate interest in the
market and at the same time, it should be high enough to raise sufficient capital for the company.
The process for determining an optimal price for the IPO involves the underwriters arranging
share purchase commitments from leading institutional investors.
PROCESS:
Once the final prospectus is printed and distributed to investors, company management meets
with their investment bank to choose the final offering price and size. The investment bank tries
to fix an appropriate price for the IPO depending upon the demand expected and the capital
requirements of the company. The pricing of an IPO is a delicate balancing act as the investment
firms try to strike a balance between the company and the investors. The lead underwriter has the
responsibility to ensure smooth trading of the company’s stock. The underwriter is legally
allowed to support the price of a newly issued stock by either buying them in the market or by
selling them short.
PRINCIPAL STEPS IN AN IPO:
Approval of BOD : Approval of BOD is required for raising capital from the public.
Appointment of lead managers : the lead manager is the merchant banker who
orchestrates the issue in consultation of the company.
Appointment of other intermediaries :
Co-managers and advisors
Underwriters
Bankers
Brokers and principal brokers
Registrars
Filing the prospectus with SEBI : The prospectus or the offer document communicates
information about the company and the proposed security issue to the investing public.
All the companies seeking to make a public issue have to file their offer document with
SEBI. If SEBI or public does not communicate its observations within 21 days from the
filing of the offer document, the company can proceed with its public issue.
Filing of the prospectus with the registrar of the companies : once the prospectus have
been approved by the concerned stock exchanges and the consent obtained from the
bankers, auditors, registrar, underwriters and others, the prospectus signed by the
directors, must be filed with the registrar of companies, with the required documents as
per the companies act 1956.
Printing and dispatch of prospectus : After the prospectus is filed with the registrar of
companies, the company should print the prospectus. The quantity in which prospectus is
printed should be sufficient to meet requirements. They should be send to the stock
exchanges and brokers so they receive them at least 21 days before the first
announcement is made in the news papers.
Filing of initial listing application : Within 10 days of filing the prospectus, the initial
listing application must be made to the concerned stock exchanges with the listing fees.
Promotion of the issue : The promotional campaign typically commences with the filing
of the prospectus with the registrar of the companies and ends with the release of the
statutory announcement of the issue.
Statutory announcement : The issue must be made after seeking approval of the stock
exchange. This must be published at least 10 days before the opening of the subscription
list.
Collections of applications : The Statutory announcement specifies when the
subscription would open, when it would close, and the banks where the applications can
be made. During the period the subscription is kept open, the bankers will collect the
applications on behalf of the company.
Processing of applications : Scrutinizing of the applications is done.
Establishing the liability of the underwriters : If the issue is undersubscribed, the
liability of the underwriters has to be established.
Allotment of shares : Proportionate system of allotment is to be followed.
Listing of the issue : The detail listing application should be submitted to the concerned
stock exchange along with the listing agreement and the listing fee. The allotment
formalities should be completed within 30 days.
Major Advantages of IPOIPO has a number of advantages. IPO helps the company to create a public awareness
about the company as these public offerings generate publicity by inducing their products to
various investors.
The increase in the capital: An IPO allows a company to raise funds for utilizing in
various corporate operational purposes like acquisitions, mergers, working capital, research
and development, expanding plant and equipment and marketing.
Liquidity: The shares once traded have an assigned market value and can be resold.
This is extremely helpful as the company provides the employees with stock incentive
packages and the investors are provided with the option of trading their shares for a price.
Valuation: The public trading of the shares determines a value for the company and sets
a standard. This works in favor of the company as it is helpful in case the company is looking
for acquisition or merger. It also provides the share holders of the company with the present
value of the shares.
Increased wealth: The founders of the companies have an affinity towards
IPO as it can increase the wealth of the company, without dividing the
authority as in case of partnership.
Drawbacks of IPOMaking important business decisions. A major risk with shareholders is that, they can sell
off their stocks any time they want, in case they see the price band of the stakes It is true that
IPO raises huge capital for the issuing company. But, in order to launch an Initial Public
Offering (IPO), it is also necessary to make certain investments. Setting up an IPO does not
always lead to an improvement in the economic performance of the company. A continuing
expenditure has to be incurred after the setting up of an IPO by the parent company. A lot of
expenses have to be incurred in the form of legal fees, printing costs and accounting fees,
which are connected to the registering of an IPO. Such expenses might cost hundreds of US
dollars. Apart from such enormous costs, there are other factors as well that should be taken
into consideration by the company while introducing an IPO. Such factors include the rules
and regulations involved to set up public offerings and this entire process on the other hand
involve a number of complexities which sometime require the services of experts in relevant
fields. Some companies hire experts to do the needful to ensure a hassle-free execution of the
task. After the IPO is introduced, the expenses become a routine in every activity involved.
Besides, the CEO of the company would have to spend a lot of time in handling the SEC
regulations or sometimes he hires experts to do the same. All these aspects, if not handled
with efficiency, prove to be some major drawbacks related to the launch of IPOs. The launch
of IPO also brings about shareholders of the company. Shareholders have ownership in the
company. The primary owners of the company or the people holding maximum authority in
the company cannot take decisions all by themselves once an IPO has been launched and
shareholders have been formed. The shareholders have an active participation in every
decision that is being taken even if they do not hold 50 percent share of the company. They
have their individual demands to be met as they own a certain percentage of stakes in the
company. The SEC regulations require notifications from the shareholders of the company,
meetings, and also approvals from them while of that company is going down. This will lead
to a further drop of the value of shares in the market which in turn will decrease the overall
value of the company.
Part 1.4
COMPANY PROFILE :
Share khan is one of the leading retail brokerage of City Venture which is running successfully since 1922 in the country. Earlier it was the retail broking arm of the Mumbai-based SSKI Group, which has over eight decades of experience in the stock broking business. Share khan offers its customers a wide range of equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, investment advice etc.
Earlier with a legacy of more than 80 years in the stock markets, the SSKI group ventured into
institutional broking and corporate finance 18 years ago. SSKI is one of the leading players in
institutional broking and corporate finance activities. SSKI holds a sizeable portion of the market in each
of these segments. SSKI’s institutional broking arm accounts for 7% of the market for Foreign
Institutional portfolio investment and 5% of all Domestic Institutional portfolio investment in the country.
It has 60 institutional clients spread over India, Far East, UK and US. Foreign Institutional Investors
generate about 65% of the organization’s revenue, with a daily turnover of over US$ 2 million. The
content-rich and research oriented portal has stood out among its contemporaries because of its steadfast
dedication to offering customers best-of-breed technology and superior market information. The objective
has been to let customers make informed decisions and to simplify the process of investing in stocks
Mission :
“To educate and empower the individual investor to make better investment decisions through
QUALITY ADVICE
INNOVATIVE PRODUCTS and
SUPERIOR SERVICE”.
WORK STRUCUTRE OF SHAREKHAN
Share khan has always believed in investing in technology to build its business. The company has used
some of the best-known names in the IT industry, like Sun Microsystems, Oracle, Microsoft, Cambridge
Technologies, Nexgenix, VignetteVeriSigngn Financial Technologies India Ltd, Spider Software Pvt.
Ltd. to build its trading engine and content. The City Venture holds a majority stake in the company.
HSBC, Intel & Carlyle are the other investors.
On April 17, 2002 Share khan launched Speed Trade and Trade Tiger, are net-based executable
application that emulates the broker terminals along with host of other information relevant to the Day
Traders. This was for the first time that a net-based trading station of this caliber was offered to the
traders. In the last six months Speed Trade has become a de facto standard for the Day Trading
community over the net. Share khan’s ground network includes over 700+ Share shops in 130+ cities in
India.
The firm’s online trading and investment site www.sharekhan.com - was launched on Feb 8, 2000. The
site gives access to superior content and transaction facility to retail customers across the country. Known
for its jargon-free, investor friendly language and high quality research, the site has a registered base of
over 3 Laces customers. The number of trading members currently stands at over 7 Laces. While online
trading currently accounts for just over5 per cent of the daily trading in stocks in India, Share khan alone
accounts for 27 per cent of the volumes traded online.
The Corporate Finance section has a list of very prestigious clients and has many ‘firsts’ to its credit, in
terms of the size of deal, sector tapped etc. The group has placed over US$ 5 billion in private equity
deals. Some of the clients include BPL Cellular Holding, Gujarat Papaya, Essar, Hutchison, Planetasia,
and Shopper’s Stop. Finally, Share khan shifted hands and City venture get holds on it.
PRODUCT AND SERVICES OFFERD BY SHAREKHAN
1- Equity Trading Platform (Online/Offline).
2- Commodities Trading Platform (Online/Offline).
3- Portfolio Management Service.
4- Mutual Fund Advisory and Distribution.
5- Insurance Distribution.
6-Forex
Share khan offers the following products:-
CLASSIC ACCOUNT
This is a User Friendly Product which allows the client to trade through website www.sharekhan.com and
is suitable for the retail investors who is risk-averse and hence prefers to invest in stocks or who does not
trade too frequently.
Features
Online trading account for investing in Equity and Derivatives via www.sharekhan.com
Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE.
Integration of On-line trading, Saving Bank and Demat Account.
Instant cash transfer facility against purchase & sale of shares.
Competitive transaction charges.
Instant order and trade confirmation by E-mail.
Streaming Quotes (Cash & Derivatives).
Personalized market watch.
Single screen interface for Cash and derivatives and more.
Provision to enter price trigger and view the same online in market watch.
TRADE TIGER
TRADE TIGER is an internet-based software application that enables you to buy and sell in an instant. It
is ideal for active traders and jobbers who transact frequently during day’s session to capitalize on intra-
day price movement.
Features
Instant order Execution and Confirmation.
Single screen trading terminal for NSE Cash, NSE F&O & BSE.
Technical Studies.
Multiple Charting.
Real-time streaming quotes, tic-by-tic charts.
Market summary (Cost traded scrip, highest clue etc.)
Hot keys similar to broker’s terminal.
Alerts and reminders.
Back-up facility to place trades on Direct Phone lines.
Live market debts.
DIAL-N-TRADE
Along with enabling access for trade online, the CLASSIC and SPEEDTRADE ACCOUNT also gives
Dial-n-trade services. With this service, one can dial Share khan’s dedicated phone lines 1800-22-7500,
3970-7500. Beside this, Relationship Managers are always available on Office Phone and Mobile to
resolve customer queries.
SHARE MOBILE
Share khan had introduced Share Mobile, mobile based software where one can watch Stock Prices, Intra
Day Charts, Research & Advice and Trading Calls live on the Mobile. (As per SEBI regulations, buying-
selling shares through a mobile phone are not yet permitted.)
PREPAID ACCOUNT
Customers pay Advance Brokerage on trading Account and enjoy uninterrupted trading in their Account.
Beside this, great discount are also available (up to 50%) on brokerage.
Prepaid Classic Account: - Rs. 2000
Prepaid Speed trade Account: - Rs. 6000
IPO ON-LINE
Customers can apply to all the forthcoming IPOs online. This is quite hassle-free, paperless and time
saving. Simply allocate fund to IPO Account, Apply for the IPO and Sit Back & Relax.
Mutual Fund Online
Investors can apply to Mutual Funds of Reliance, Franklin Templeton Investments, ICICI Prudential, SBI,
Birla, Sundaram, HDFC, DSP Merrill Lynch, PRINCIPAL and TATA with Share khan.
Zero Balance ICICI Saving Account
Share khan had tied-up with ICICI bank for Zero Balance Account for Share khan’s Clients. Now their
customers can have a Zero Balance Saving Account with ICICI Bank after your demat account creation
with Share khan.
REASON TO CHOOSE SAHREKHAN LIMITED
Experience
SSKI has more than eight decades of trust and credibility in the Indian stock market. In the Asia Money
broker's poll held recently, SSKI won the 'India's best broking house for 2004' award. Ever since it
launched Share khan as its retail broking division in February 2000, it has been providing institutional-
level research and broking services to individual investors.
Technology
With their online trading account one can buy and sell shares in an instant from any PC with an internet
connection. Customers get access to the powerful online trading tools that will help them to take complete
control over their investment in shares.
Accessibility
Share khan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for investors. These
services are accessible through many centers across the country (Over 650 locations in 150 cities), over
the Internet (through the website www.sharekhan.com) as well as over the Voice Tool.
Knowledge
In a business where the right information at the right time can translate into direct profits, investors get
access to a wide range of information on the content-rich portal, www.sharekhan.com. Investors will also
get a useful set of knowledge-based tools that will empower them to take informed decisions.
Convenience
One can call Share khan’s Dial-N-Trade number to get investment advice and execute his/her
transactions. They have a dedicated call-center to provide this service via a Toll Free Number 1800 22-
7500 & 39707500 from anywhere in India.
Customer Service
Its customer service team assist their customer for any help that they need relating to transactions, billing,
demat and other queries. Their customer service can be contacted via a toll-free number, email or live
chat on www.sharekhan.com.
Investment Advice
Share khan has dedicated research teams of more than 30 people for fundamental and technical research.
Their analysts constantly track the pulse of the market and provide timely investment advice to customer
in the form of daily research emails, online chat, printed reports etc.
Benefits
Free Depository A/c
Instant Cash Transfer
Multiple Bank Option.
Secure Order by Voice Tool Dial-n-Trade.
Automated Portfolio to keep track of the value of your actual purchases.
24x7 Voice Tool access to your trading account.
Personalized Price and Account Alerts delivered instantly to your Mobile Phone & E-mail
address.
Live Chat facility with Relationship Manager on Yahoo Messenger
Special Personal Inbox for order and trade confirmations.
On-line Customer Service via Web Chat.
Enjoy Automated Portfolio.
Buy or sell even single share
Anytime Ordering.
NEED FOR THE STUDY:
A script performing in the primary market is essentially monitored, the factor that are to
be monitored offer price. The analysis of this helps the investors in making a better
investment decision .As the firm SHARE KHAN ,plays the role of leading financial
services providing company, there is a need for them in analyzing the performance of
scripts in the primary market.
SCOPE OF THE STUDY.
The scope lies in determine the future prospectus for the investor in making investment
decision.
The study provides a comprehensive overview of performance of script in the primary
market.
The study aims to find out the profitable issues among the total issues passes out during
the period.
OBJECTIVES .
To determine the future prospectus for the investor in making investment decision.
To find out the profitable issues among the total issues passed out during the period.
To analyze the performance of IPO over certain period(3 YEARS).
To know the market rate of return for the same period.
To understand the Benefits to investor from IPOs
LIMITATIONS.
Only companies previous track record is being considered in case investing decision,
window dressing can be made in balance sheet in order to attract.
The study has been limited to a period of 4 years.
The study has been focused only on performance of script in primary market.
Only past performance are considered for the study, they do not guarantee future
performance and growth.
Investor may not get the preferred number of units as the allocation is based on random
draw.
REVIEW OF LITERATURE.
THE IMPACT OF TMT BOARD MEMBER CONTROL ANDENVIRONMENT
ON POST-IPO PERFORMANCE
BRUCE A. WALTERS ,MARK KROLL Louisiana Tech University
PETER WRIGHT University of Memphis
Academy of Management Journal 2010, Vol. 53, No. 3, 572–595.
We draw on theories of entrepreneurial firms to explore the impact of top management team
(TMT) board control on holding period returns (HPRs). We posit a complex relation between a
firm’s performance after initial public offering (IPO) and the proportion of TMT members on its
board. HPRs increased modestly as TMT board membership rose to 50 percent, increased
dramatically as it rose from 50 to 75 percent (the “optimal” range), and decreased materially as it
rose beyond 75 percent. Further, environmental conditions influenced the focal relationship, in
some cases in unpredictable ways, even when TMT board control was optimal.
The post-offering performance of IPOs in the Indian banking industry
Saurabh Ghosh , Monetary Modelling Unit, Monetary Policy Department,
Reserve Bank of India, NCOB, Mumbai-400001, India, Applied Economics Letters, 2005,
12, 89–94.
In the literature, the underperformance of IPOs is a well-documented empirical anomaly.
This study concentrates on IPOs from the banking sector of an emerging economy, India. In a
developing country, the role of the banking sector for economic development is undisputed. In
view of its importance in economic resource allocation and its distinction from other industries in
general, this paper analyses the post offering performance of banking sector IPOs in detail. The
performance evaluation on the basis of stock returns did not find significant evidences of
underperformance for the IPOs from the banking sector. Moreover, the study, based on key
accounting parameters, found improvement in the performance of the banks in the post-listing
period. There were no significant differences across ownership groups (public sector banks vis-
a`-vis their private counterpart) in the IPO performance.
Underpricing of Initial Public Offerings
The Indian Experience SAURABH GHOSH
Emerging Markets Finance and Trade, vol. 41, no. 6,
November–December 2005, pp. 45–57.
© 2006 M.E. Sharpe, Inc. All rights reserved.
ISSN 1540–496X/2006 $9.50 + 0.00.
This paper attempts to identify the factors explaining under pricing of initial public
offerings (IPOs) in an emerging economy, India, using 1,842 companies that got listed on the
Bombay Stock Exchange from 1993 to 2001. It is found that uncertainty played a role in
perverse under pricing in the Indian primary market. IPOs with a large issue size and those that
went for seasoned offerings had less under pricing. Contrary to the international evidence, under
pricing was less during the high volume (hot) period compared to the slump period in the Indian
IPO market. During the hot period, new issues belonging to business groups underpriced more
than their stand-alone counterparts did. Small issues belonging to private stand-alone firms had
less under pricing during the hot period and did not come to the market subsequently to raise
funds. Large issues belonging to the business groups, on the other hand, underpriced more and
subsequently raised funds from the market. These results support the predictions of signaling
theory for the IPOs listed in the Indian stock markets over the last decade.
IPO Valuation, Investor Protection and Deregulation:
Evidence from Bursa Malaysia
WAN NORDIN WAN HUSSIN, Universiti Utara Malaysia
The International Journal of Accounting, Governance & Society 1, 1-24 (2006)
The paper examines (1) the valuation impact of IPO profit guarantee as an investor
protection tool, and (2) the structural changes in IPO pricing before and after deregulation in
1996. Based on a sample of 251 IPOs during 1994-2000, the evidence points to the paradoxical
role of the IPO profit guarantees.
Prior to the Asian financial crisis in the third quarter of 1997, investors are willing to pay
more for the IPO shares the more the controlling shareholders guaranteed the forecasted profits.
However, in the aftermath of the crisis, IPO profit guarantees no longer affect IPO valuation.
Comparing IPO pricing before and after liberalisation, the evidence also lends support to Habib
and Ljungqvist (2001) entrepreneurial wealth losses minimisation hypothesis. When IPO
entrepreneurs are given the freedom to set the IPO price without interference from the regulator,
they factor in their IPO participation ratio in the pricing decision.
CORRECTING THE EMPIRICAL FOUNDATIONS OF IPO-PRICING
REGULATION
ROYCE DE ROHAN BARONDES*
FLORIDA STATE UNIVERSI TY LAW REVIEW [Vol. 33:437]
Recent events are replete with stories of fraudulent or opportunistic behavior in the initial
public offering (IPO) process—behavior that extended to the highest-reputation investment
banks. Curiously, notwithstanding this evidence, recent financial economics literature asserts
investment bank conflicts of interest “certify” IPO issuers. This Article develops new empirical
evidence that casts doubt on this “certification” hypothesis by examining the pre-IPO price
adjustment of IPOs involving qualified independent underwriters (QIUs),particularly IPOs in
which more than ten percent of the net proceeds are being directed to participating investment
banks (for example, to repay a prior extension of credit). These offerings have similar preIPO-
pricing patterns to those others interpret as involving certification. Investment bank exit,
however, cannot comfortably be categorized as certification. These results, together with other
recent results in the legal literature, support the view that factors other than “certification”
account for IPO-pricing phenomena in IPOs involving investment bank conflicts of interest.
The SEC is finally considering important proposals put forward by the NASD and the NYSE to
reform IPO marketing, albeit five years after the internet bubble in IPOs and other securities
transactions burst. These results support increased disclosure-focused regulation of the IPO
process.
An Investment Strategy Based on the Long-Run Performance of IPOs: Venture-
Backed and Non-Venture-Backed Firms
Junming Hsu, Chia-Yu Chang.The Journal of Investing Winter 2008, Vol. 17, No. 4: pp. 95-
105 DOI: 10.3905/JOI.2008.17.4.095
This study investigates the evolution and long-run performance of venture-backed and non-
venture-backed firms after the initial public offerings (IPOs). We hypothesize that the
entrepreneurial ability enables venture-backed firms to keep a good performance in the long run.
The results show that firms underperform the market over the five years following the IPOs, with
venture-backed firms outperforming non-venture-backed firms. About six years after the IPOs,
however, firms still alive outperform the market, with venture-backed firms showing superior
performance. We also find that venture-backed firms with glamour performance from year 2 to
year 5 after the IPOs tend to maintain good performance from year 6 to year 9. This result
supports our hypothesis that the entrepreneurial ability of venture-backed firms lasts for a long
period. Putting these results together, we suggest that holding a portfolio consisting of glamour
venture-backed stocks listing for about six years is a profitable strategy.
Investment Banking Conflicts: Research Analysts and IPO Allocations
PHILLIPKENNEDY(PP199-238).DOC
As investors sobered up from the “irrational exuberance” of the tech stock bubble, a
critical eye turned to securities industry practices.1 In hindsight, few people could understand
what pushed the markets so high when the tech stocks that lead the charge had nothing to show
in the way of profits.2 The answer seemed to be that research analysts consistently were bullish
on many stocks and remained so even as the bubble burst and the market price of many of those
same stocks plunged.3 What explains the analysts’ behavior? Some charge that research analysts
of the major investment banking firms created the stock boom by hyping the stock of companies
for which their investment banks had provided or were seeking to provide investment banking
services.The companies benefited because their stock price rose. In exchange, the banksn
benefited when they received large investment banking fees for services provided to those
companies.6 The alleged effect was that small investors were misled by these optimistic
recommendations, which investors assumed were objective, and then lost out when the stocks
eventually tumbled.7 In addition, banks doled out initial public offering (IPO) shares to
company executives purportedly in exchange for prior or continued investment banking
business, a transaction known as spinning.8 Overly optimistic stock analysis created artificial
demand, allowing executives to reap huge profits during the tech stock boom days of the late
1990s when they sold those IPO stocks almost immediately. After an investigation by New
York’s Attorney General, Eliot Spitzer, Merrill Lynch entered into a $100 million settlement in
May of 2002 that restricted interactions between its research analysts and bankers.10 Following
New York’s lead, the Securities and Exchange Commission (SEC) approved proposed rule
changes for two self-regulatory organizations (SROs), the National Association of Securities
Dealers (NASD) and the New York Stock Exchange (NYSE).
FINDINGS.
Pharma sector provides an average listing return of 13.5%
Mining sector provides an average listing return of 32.25%
Power sector provides an average listing return of 4.38%
Media sector provides an average listing return of 8.91%
Accesories sector provides an average listing return of 4.62%
Realty sector provides an average listing return of 15.51%
Bank sector provides an average listing return of 24.12%
Engg & metal sector provides an average listing return of 26.59%
IT sector provides an average listing return of 26.97%
Retail sector provides an average listing return of 1.09%
Most number of IPO’s came from realty sector (21).
Mining &IT sector provides better listing day return i.e.32.25%,27% resp.
Worst listing day return is been provided by Retail & power (1.09%,4.38% resp)
One year holding perspective Media provides a good return when compared to other
sector.
Two year holding perspective IT provides a good return.
Three year holding perspective IT provides a good return.
Best listing day return by individual stock is by Lotus health care ,it provided 177.5%
return.
Worst listing day return by individual stock is by Chemcel biotech ,it provided -34.75%
return.
IT is the most attractive sector for investment from the analysis made.
Engineering & Realty are the unattractive sectors for investment.
SUGGESTION.
IPO provides a better short term return when compared to other investments.
The aggregate listing day return provided by all sectors are positive therefore it is
better advised to exit on listing day and reenter at lower levels
IT & Bank proves to be a good investment strategy for long term perspective.
Investors are suggested not to invest in Realty,Engg&metal sector for long term.