1) Literature review

II.A. Behavioral finance and IPOs

Behavioral economists have demonstrated that individuals often violate Bayes' Rule
and rational choice theories when making decisions under uncertainty in experimental settings
(Kahneman and Tversky (1982)). In a similar vein, financial economists have also discovered
long-run pricing anomalies that have been attributed to investor sentiment. Behavioral theories
posit that investors give too much weight to recent results and trends. Eventually, over-
optimistic investors are disappointed and subsequent returns decline.

II.B. Performance measurement

Another area of relevant research considers the choice of metric to measure firms’
performance. Several recent papers inform our choice of tests of long-horizon abnormal
performance. Barber and Lyon Kothari and Warner (1997), and Lyon, Barber, and Tsai (1999)
provide thorough evidence about various methods of measuring abnormal performance.
2) Literature Review :
The underpricing of initial public offerings (IPOs) is referred to in the literature as one of the
anomalies observed in primary markets all over the world. The extent of it, however, varies
from country to country. Underpricing refers to the positive initial returns over the offer to
listing dates of the new issues. It is defined as the percentage difference between the closing
price on the listing date from the offer price of the issue. It is a cost to the issuers and has
drawn considerable attention in the academic literature over the last three decades.
GadeSurendar and Dr. S. KamaleshwarRao (2011) Companies raise capital in the primary
market by way of an initial public offer, rights issue or private placement. An Initial Public
Offering (IPO) is one through which an unlisted company makes either a fresh issue of
securities or an offer for sale of its existing securities or both for the first time to the public.
This paves way for listing and trading of the issuer’s securities. IPOs deepen the market,
diversify investor’s portfolios, reduce volatility in stock prices, bring domestic investors
money into the market and attract Foreign Institutional Investor funds.
3) Literature Review:
Batool K. Asiri and Aalaa J. Haji (2014) documented the phenomenon of underpricing
initial public offerings (IPOs) for 194 firms that went public between 2000 and 2013 in the
markets of the six gulf cooperation council (GCC) countries. It investigates factors that
potentially influence abnormal returns on the first day trading and focuses on assessing the
most prominent determinants of the underpricing of IPOs in the GCC region.
4)Literature Review
Reviewing the existing literature provides, the researcher with exhaustive information on the
previous studies, which helps in finding the research gap and forms the basis for the further
studies. It is in this context, the research papers of the various authors have been reviewed for
the better understanding of the topic.

Ranjitha.R Dr.Nirmala Joseph (2016):

Studied the performance of the IPOs during the period 2009 to 2013, The study shows
conclusive evidence of initial abnormal returns of a majority of IPOs considered for study.
This finding is indicative of the presence of Underpricing of IPOs.

Garima Baluja(2013): She opines that listing performance of the companies differs just by
chance or may be by some other factors such as subscription level, Age, venture capitalist
reputation, IPO size etc.
5) Literature Review
Kakati (1999) studied the performance of IPOs that came in the market during January 1993
to March 1996 and concluded that the short run underpricing is of 36.6% and in the long-run
overpricing is40.8%.It is analyzed that IPOs of January, 2001 to August, 2011, most of the
stocks have generated listing profits whereas in long term most of the companies have
underperformed compared to market returns.

Bagga, Khurana & Singh(2012) advised three strategies for investors when investing in an IPO
- a) Sell all the allotment on listing day itself, b) Partial profit booking on listing and rest
holding for long term and c) holding for a period of more than 5 years. As per Jotwani and
Singh (2011) subscription rate of the IPO plays major role only in short run. Investors may try
to analyses the demand-supply situation of the IPO before investing, which has little
significance in the long run. They also mentioned the objective of the IPO showed its
significance only in the long run, i.e., five years after the IPO.
6)Literature Review

Short term and long term performance of IPO Prof: Ms. Swati Mehta
This study says the short term is positive i.e. average MAAR is 81.46% and the long-term
performance is negative for each month i.e. average CAAR. Short term performance of IPO‟s
is the positive and the higher chance to earn returns in short-term IPO‟s for Indian investors.
The long term performance of these companies shows that investment in Indians IPO‟s
provides negative abnormal return by the end of the 36 month. This study shows that
investment in IPOs generally negative benefit to Indian investors in long term IPO‟s. And
positive for short term IPO‟s.
7) Literature Review
DIRECT COMPARISION APPROACH TO IPO VALUATUION IN INDIAN
CAPITAL MARKET: DR. T.V.N.RAO:
In the wake of economic liberalization, companies are relying more on the capital market,
acquisitions and restructuring are becoming common place, strategic alliances are gaining
popularity, employee stock option plans are proliferating, and regulatory bodies are
struggling with tariff determination. In these exercises a crucial issue is: how should the value
of a company or a division thereof is appraised. The goal of such an appraisal is essentially to
estimate a fair market value of a company. The fair market value is the price at which the
property would change hands between a willing buyer and a willing seller when the former is
not under any compulsion to buy and the latter is not under any compulsion to sell, both
parties having reasonable knowledge of relevant facts.

When the asset being appraised is a company, the property the buyer and the seller are trading
consists of the claims of all the investors of the company; this includes outstanding equity
shares, preference shares, debentures and loans.
8) Literature Review
A Study on Initial Public Offering IPO‟S: Prof. Shweta Bhardwaj
The issue of an IPO by a Company involves a number of stages, each calling for a great deal
of verification. The relevant and updated information on the Company has to be captured
precisely in the Prospectus. The decision by the Investors on whether to invest in a Company
is influenced significantly by the information contained in the Prospectus. The Regulatory
Bodies are also involved and there are set procedures that must be followed. Legal compliance
has to be maintained. Moreover, the Company’s potential should not be understated in or lost
in the Prospectus because of the weight of such rules, regulations and formalities. Initial public
offerings of companies are popular with investors. In the recent years due to its popularity
gained many companies have been registered with heavy over subscriptions. Though it is
profitable to investors, a certain amount of caution is desirable.
9)Literature Review
Relationship between Demand and Initial Performance in Indian IPO Market Prof.B.V.
Rudramurthy:
Indian stock market saw an enormous amount of IPO‟s during the last financial year, with
majority of them oversubscribing for more than 10 times. In this study a try was made to find
whether there is any relation between demand and return after listing. T statistic was used to
test the hypothesis and the results obtained show a declining trend on the T-statistic from day
1 to day 23. There exist a high level of relationship between demand and return, hence
alternative hypothesis shall be accepted. However from day 24 to day 30 T- test values are too
negligible and null hypothesis shall be accepted for long durations.
10)Literature Review
Ritter 1991

1526 IPOs, 1975-84, USA, Quantitative and event study cumulative average adjusted returns
(CAR, Buy and Hold return (BHR), Cross sectional and time series analysis. Wealth relative,
mean, median, percentile- 25%, 75%.

The average initial return is 16.4% in USA’s equity Capital. A control sample of 1,526 listed
stocks, matched by industry and market value, produce an average total return of 61.86% over
this same 3 year holding period. The gross proceeds categories and initial day return display
long-run underperformance. Matching firms perform better than IPOs in long run. As the
median 3 year return is -16.67% contrasted with matching firms median return 38.54%.