Abstract
In this paper, we establish the significance and effects of initial public offer (IPO) offer price ranges on subscription, initial trading, and post-IPO ownership structures. The primary market in India provides a unique setting for estimating the effect of various initial public offer (IPO) price ranges and IPO issue factors on the initial demand for an IPO among investors, measured by full IPO subscription/oversubscription, initial turnover (liquidity), and the post-IPO listing ownership structure among investors (ownership). For the IPO pre-listing stage, this study uses firth logistic regression to estimate the effect of various IPO offer price ranges (low to high) and various IPO issue factors on the full subscription/oversubscription of an IPO in each investor category. For the post-IPO listing stage, the study uses OLS regression to estimate the effect of various IPO offer price ranges (low to high) and various IPO issue factors on the initial trading ratio (IPO listing day trading) and the ownership percentage between institutional and individual investors. We find that all investor categories show a lesser likelihood for full subscription or oversubscription of an IPO issue at the lowest range of IPO offer prices. At the post-listing stage, the results indicate a diverse IPO offer price range in which individuals and institutions maximize their respective ownership holdings after the IPO listing. The results further show that lower promoter holdings diffuse higher ownership among individual shareholders by targeting lower IPO offer prices, thus increasing control.
Highlights
When a company goes for an initial public offer (IPO), the number of shares issued and the offer price per share are decided by the company in consultation with the lead manager for the public issue
The firth logistic regression model results show the binary outcome for the dependent variable that is regressed against each IPO offer price range for all investor categories (RIIs, Non-Institutional Investors (NII), and Qualified Institutional Buyer (QIB))
The results show a lower likelihood for full subscription or oversubscription at the lowest range of IPO offer price (i.e., INR 0–50) for all categories of investors (RII coef. (−)0.891; p-value 0.028); NII coef. (−) 1.43; p-value 0.001; QIsB coef. (−) 1.83; p-value 0.001)
Summary
When a company goes for an initial public offer (IPO), the number of shares issued and the offer price per share are decided by the company in consultation with the lead manager for the public issue. The company can alter the offer price by increasing or decreasing the number of issued shares. In the United States, companies have maintained IPO offer prices between $15 and $20 since 1976 (Weld et al 2009). It is remarkable that companies have been able to maintain such a narrow band for more than 30 years. In the Indian context, corporations tend to gravitate toward lower IPO offer prices (Figure 1). Given the IPO issue size and the number of equity shares on offer, the IPO offer price has little economic significance
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