Relationship between Underpricing and Post IPO Performance: Evidence from Indian IPOs

Abstract

Deterioration in post IPO operating performance is a well-established fact in financial economics literature. The current article extends this discussion by exploring the relationship between post IPO performance deterioration and underpricing. Level of underpricing is used as a proxy for signalling. The analysis was done by dividing the whole sample into two groups: low underpricing group and high underpricing group and then examining the trend in post IPO performance deterioration for both the groups. The expectation was that the group with low underpricing would show more deterioration in performance than group with high underpricing. Study found that overall performance of firms deteriorated for both the groups but the difference in trend was not found to be significantly different and hence the difference in change in performance for both the group cannot be attributed to underpricing. Our results supported the results obtained by Jain and Kini ( 1994 ), Jegadeesh, Weinstein and Welch ( 1993 ) and Garfinkel ( 1993 ). However, like Jain and Kini ( 1994 ) we also do not conclude against signalling model.