Information and performance optimization: a study of Indian IPOs during 2005-2012

Purpose The purpose of this paper is to focus on examining the first day returns of initial public offerings (IPOs) and the role of information on their performance. The study tries to optimize the returns of the new issues during 2005-2012 with risk as a constraint. Design/methodology/approach The initial returns are measured through the market-adjusted excess return and the risk associated with the new issue is measured through underwriters’ reputation. The returns have been optimized through a mixed integer linear problem using the Maple software. Findings The previous studies show that various informational variables affect the listing day returns significantly. The results of the present study indicate that the mean of initial returns for IPOs during 2005-2012 is 18.03 and the mean risk for these issues is 0.46. The findings also suggest that the optimal returns are obtained in the pre-recession era (2005-2008) and the value for the same is 50.02 percent. Originality/value The current study contributes in the investment decisions for global investors as every investor wants to maximize his/her returns. The optimal returns with risk as a constraint will help the investors in improving their investment decision as a prudent investor does not aim solely at maximizing the expected return of an investment but is also interested in optimizing with the minimization of risk.

[1]  S. Deb,et al.  Information Content of IPO Grading , 2008 .

[2]  Y. Amihud,et al.  Allocations, Adverse Selection and Cascades in Ipos: Evidence from the Tel Aviv Stock Exchange , 2003 .

[3]  Hans Kellerer,et al.  Selecting Portfolios with Fixed Costs and Minimum Transaction Lots , 2000, Ann. Oper. Res..

[4]  Peter M. Clarkson,et al.  The association between audit quality, retained ownership, and firm-specific risk in U.S. vs. Canadian IPO markets , 1994 .

[5]  Arwah Arjun Madan,et al.  INVESTMENTS IN IPOS IN THE INDIAN CAPITAL MARKET , 2003 .

[6]  Maria Grazia Speranza,et al.  Heuristic algorithms for the portfolio selection problem with minimum transaction lots , 1999, Eur. J. Oper. Res..

[7]  Kent L. Womack,et al.  Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling , 2001 .

[8]  Sheridan Titman,et al.  The Determinants of Capital Structure Choice , 1988 .

[9]  Maria Grazia Speranza,et al.  Semi-Absolute Deviation Rule for Mutual Funds Portfolio Selection , 2003, Ann. Oper. Res..

[10]  Roger G. Ibbotson,et al.  INITIAL PUBLIC OFFERINGS , 1988 .

[11]  Thomas H. Eyssell,et al.  Signalling, Insider Trading, And Post-Offering Performance: The Case Of Initial Public Offerings , 2011 .

[12]  Jay R. Ritter,et al.  Signaling and the Valuation of Unseasoned New Issues: A Comment , 1984 .

[13]  Rohit Bansal,et al.  Determinants of IPOs Initial Return: Extreme Analysis of Indian Market , 2012 .

[14]  William L. Megginson,et al.  The Financial and Operating Performance of Newly Privatized Firms: an International Empirical Analysis , 1994, Estudios de Administración.

[15]  Jay R. Ritter,et al.  The "Hot Issue" Market of 1980 , 1984 .

[16]  Jean-Marc Suret,et al.  The Aftermarket Performance of Initial Public Offerings in Canada , 2001 .

[17]  Barbara A. Lougee,et al.  Earnings Informativeness and Strategic Disclosure: An Empirical Examination of 'Pro Forma' Earnings , 2004 .

[18]  Zeynep Onder,et al.  Underwriter Reputation and Short-Run IPO Returns: A Re-Evaluation for an Emerging Market , 2004 .

[19]  H. Feldmann,et al.  An examination of underperformance and liquidity of initial public offerings by high growth stocks on the German Neuer Markt , 2004 .

[20]  I. Hasan,et al.  The Underpricing of Venture and Nonventure Capital IPOs: An Empirical Investigation , 1999 .

[21]  Andreas G. Merikas,et al.  Global shipping IPOs performance , 2009 .

[22]  Daniel Dorn,et al.  Does Sentiment Drive the Retail Demand for IPOs? , 2003, Journal of Financial and Quantitative Analysis.

[23]  Silvio Vismara,et al.  Handbook of Research on IPOs , 2014 .

[24]  N. Kulendran,et al.  Evaluation of Short-Run Market Performance and Its Determinants using Binary Models: Evidence from Australian IPOs , 2014 .

[25]  Lorenzo Weisman.  The advent of private equity in Latin America , 1996 .

[26]  Saurabh Ghosh,et al.  Underpricing of Initial Public Offerings: The Indian Experience , 2005 .

[27]  James M. Johnson,et al.  Investment Banker Prestige and the Underpricing of Initial Public Offerings , 1988 .

[28]  Saurabh Ghosh,et al.  Underpricing of Ipos: The Indian Experience Over the Last Decade , 2002 .

[29]  Ashutosh Kumar Singh,et al.  Underwriter Reputation, Initial Returns, and the Long‐Run Performance of IPO Stocks , 1998 .

[30]  C. Padmavathi,et al.  Underpricing of Initial Public Offerings in Indian Capital Market , 2012 .

[31]  Mohamed Nasr,et al.  Performance of Initial Public Offerings in Pakistan , 2007 .

[32]  Kannan Ramaswamy,et al.  Organizational ownership, competitive intensity, and firm performance: An empirical study of the Indian manufacturing sector , 2001 .

[33]  Steven Manaster,et al.  Initial Public Offerings and Underwriter Reputation , 1990 .

[34]  Sanjay Sehgal,et al.  Valuation of IPOs in India-An Empirical study , 2013 .

[35]  Saverio Bozzolan,et al.  Information Asymmetries and IPO Underpricing: The Role of Voluntary Disclosure of Forward-Looking Information in the Prospectus , 2007 .

[36]  Dongwei Su,et al.  Leverage, insider ownership, and the underpricing of IPOs in China , 2004 .

[37]  Rohit Bansal,et al.  High credit rating IPOs and determinants of underpricing , 2013 .

[38]  Harjeet S. Bhabra,et al.  IPO Prospectus Information and Subsequent Performance , 2003 .

[39]  Daniel Bradley,et al.  An examination of IPO secondary market returns , 2009 .

[40]  Philipp Kurmann,et al.  Capacity effects and winner fund performance: the relevance and interactions of fund size and family characteristics , 2011 .

[41]  Poonam Rani.  An Empirical Examination of Firm Characteristics and Its Impact on Listing Day Return , 2014 .

[42]  William L. Megginson,et al.  Venture Capitalist Certification in Initial Public Offerings , 1991 .

[43]  Halil Kiymaz,et al.  The initial and aftermarket performance of IPOs in an emerging market: evidence from Istanbul stock exchange , 2000 .

[44]  Roni Michaely,et al.  The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories , 1994 .

[45]  Jeff Madura,et al.  What factors drive IPO aftermarket risk? , 2008 .

[46]  Leila Yazdani,et al.  An Assessment of the Performance of Initial Public Offering (IPOs) in Malaysia , 2015 .

[47]  Thomas M. Springer,et al.  THE SURVIVAL OF INITIAL PUBLIC OFFERINGS IN THE AFTERMARKET , 1997 .

[48]  Bharat A. Jain,et al.  Does the Presence of Venture Capitalists Improve the Survival Profile of IPO Firms , 2000 .

[49]  Deborah J. Lucas,et al.  Equity Issues and Stock Price Dynamics , 1989 .

[50]  Sanjay Dhamija,et al.  Impact of Quality Certification on IPO Underpricing: Evidence from India , 2017 .

[51]  Hayne E. Leland,et al.  INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION , 1977 .

[52]  Todd A. Finkle,et al.  The Relationship between Boards of Directors and Initial Public Offerings in the Biotechnology Industry , 1998 .

[53]  Hiroshi Konno,et al.  PIECEWISE LINEAR RISK FUNCTION AND PORTFOLIO OPTIMIZATION , 1990 .

[54]  Satyendra Kumar Sharma,et al.  The Relationship between IPO Underpricing Phenomenon & the Underwriter’s Reputation , 2010 .

[55]  Ana M. Romero-Martinez,et al.  Exploring corporate entrepreneurship in privatized firms , 2010 .

[56]  F. Reilly,et al.  An Examination of Mispricing, Returns, and Uncertainty for Initial Public Offerings , 1987 .

[57]  George Tanewski,et al.  Delineating Publicly Listed Family and Nonfamily Controlled Firms: An Approach for Capital Market Research in Australia** , 2007 .

[58]  Joseph P. Ogden,et al.  Pursuing Value Through Liquidity in IPOs: Underpricing, Share Retention, Lockup, and Trading Volume Relationships , 2005 .

[59]  J. Ritter.  The Long-Run Performance of Initial Public Offerings , 1991 .

[60]  Emre Unlu,et al.  IPO underpricing over time: evidence from the UK , 2004 .

[61]  Michael J. Brennan,et al.  Underpricing, ownership and control in initial public offerings of equity securities in the UK , 1997 .

[62]  P. Schultz,et al.  Unit initial public offerings *1: A form of staged financing , 1993 .

[63]  W. Sycip.  Professional services in emerging asian markets: The Indonesian case , 1996 .

[64]  Byung Ha Lim,et al.  A Minimax Portfolio Selection Rule with Linear Programming Solution , 1998 .

[65]  Amir Kirsh,et al.  Allocations, Adverse Selection and Cascades in Ipos: Evidence from Israel , 2001 .

[66]  F. Cesarone,et al.  Portfolio selection problems in practice: a comparison between linear and quadratic optimization models , 2011, 1105.3594.

[67]  Muhammad Zubair Mumtaz,et al.  An Examination of Short-Run Performance of IPOs Using Extreme Bounds Analysis , 2016 .