An empirical investigation of market timing behavior: evidence from Indian IPOs

Manas Mayur

doi:10.21511/imfi.13(3).2016.07

Abstract

The purpose of this paper is to investigate the market timing behavior of issuers of Indian Initial Public Offerings (IPOs). It was found that investor’s expectation that earnings growth will continue after IPO were not even sustained in post IPO period. The constant decline in P/E and M/B suggested that firms took advantage of over-optimism of investors. The deterioration in post IPO performance show that issuer took benefit of pre IPO profit margin knowing that the level would not be continued in the future. Considering that the issuers took advantage of favorable market condition, a multivariate analysis was carried out to examine whether issuers tried to maximize their proceeds through IPO or not. The idea is that any market timing aspect should get reflected in the effort to maximize proceeds in the favorable market condition. The result based on multivariate regression suggest that market timers, identified as firms that go public when the market is hot, tried to maximize the total proceeds at the time of IPO. The hot issue market effect was remarkably robust; it was significant for both firm and industry-level characteristics

Highlights

Market timing aspect has attracted many researchers ever since Ibbotson and Jaffe (1975) documented the concept of “Hot issue market”
Most of the studies on market timing estimated Hot issue market by establishing relationship between high volume of Initial Public Offerings (IPOs) numbers and high initial return and asserted that the market timing effort should be reflected in the degree of positive correlation between the two, i.e., more is the number of IPOs followed by high initial return more is the possibility that issuers timed their issue
The constant decline in price-toearnings ratio (P/E) and market-to-book ratio (M/B) suggest that firms took advantage of over-optimism of investors

Summary

Introduction

Market timing aspect has attracted many researchers ever since Ibbotson and Jaffe (1975) documented the concept of “Hot issue market”. Most of the studies on market timing estimated Hot issue market by establishing relationship between high volume of IPO numbers and high initial return and asserted that the market timing effort should be reflected in the degree of positive correlation between the two, i.e., more is the number of IPOs followed by high initial return more is the possibility that issuers timed their issue. Ghosh (2005) conducted his study on Indian IPOs wherein he tried to investigate whether Indian IPO volumes can be determined by initial average return of IPOs or not He found that there was no significant relation between IPO volume and initial returns during Hot and Cold a market which was on a contrary to the results of studies on developed nation (Ibbotson and Jaffe, 1975; Ritter, 1984; Ritter and Sindelar, 1988; Lowry and Schwert, 2002, etc).

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