A STUDY ON POST ISSUE PERFORMANCE OF INITIAL PUBLIC OFFERING (IPO S) IN THE INDIAN CAPITAL MARKET

By GOPINATH.A Reg No. 41909631032 Of SRI SAI RAM ENGINEERING COLLEGE A PROJECT REPORT Submitted to the faculty of management studies In partial fulfillment of the requirements For the award of the degree of MASTER OF BUSINESS ADMINISTRATION ANNA UNIVERSITY JUNE-2011

ABSTRACT
The project work entitled A Study on the Performance of Cement Industry in the Indian Capital Market is conducted in SHAREKHAN,Parry s,Chennai to evaluate the performance of select cement industry in Indian Capital Market.The cement industry which are listed are :  ACC LTD  AMBUJA CEMENTS  GRASIM  ULTRATECH

This study will give a basic idea about the financial performance of the cement industry in the Indian Capital Market. This study finds out the volatility of each stock to identify the most consistent and inconsistent stock.

For this study 5 years data is used. The data is taken from the balance sheet of the companies. Using the data, ratio analysis was performed to find out the financial performance of the companies. Using standard deviation and Beta value, the volatility of the stocks can be identified. Analyzing the price movements, the price fluctuation and market movement of each stock is identified.

Major findings are reported at the end of the project .On the basis of findings suitable suggestions have been made to the investors.

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CHAPTER I INTRODUCTION .

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A privately held company has fewer shareholders and its owners don't have to disclose much information about the company.1. The capital raised never has to be repaid. it can borrow cash or sell stock to raise needed funds. The most important objective of an IPO is to raise capital for the company. The company is not required to repay the capital and the new shareholders get a right to future profits distributed by the company. In other words. . Compared to the costs of borrowing large sums of money for ten years or more. it refers to the first sale of a company¶s common shares to investors on a public stock exchange. It helps a company to tap a wide range of investors who would provide large volumes of capital to the company for future growth and development. Companies fall into two broad categories: Private and Public . with an intention to raise new capital. there is also the possibility for appreciation of the share price due to market factors not directly related to the company. the costs of an initial public offering are small. which is followed by the listing of a company¶s shares on a stock exchange. is known as an µInitial Public Offering¶. When a privately held corporation needs additional capital. Often "going public" is the best choice for a growing business. When a company sells its stock publicly.1 INTRODUCTION INDUSTRY PROFILE INITIAL PUBLIC OFFERING (IPO) The first public offering of equity shares or convertible securities by a company. A company going for an IPO stands to make a lot of money from the sale of its shares which it tries to anticipate how to use for further expansion and development.

SIGNIFICANCE OF IPO Investing in IPO has its own set of advantages and disadvantages. if successful. can help the company to expand in the marketplace. Typically. Going public can also boost a company¶s reputation which in turn. it is important to consider the positive and negative effects that going public may have on their mind. Thus . Trading in the open markets means liquidity. But then investment also comes with an advantage for both the company and the investors. As long as there is market demand. Going public raises cash and usually a lot of it. Where on one hand. But there can be other benefits. This is discussed in detail as follows: . Being publicly traded also opens many financial doors: Because of the increased scrutiny. public companies can usually get better rates when they issue debt. companies go public to raise and to provide liquidity for their shareholders. This makes it possible to implement things like employee stock ownership plans. a public company can always issue more stock.mergers and acquisitions are easier to do because stock can be issued as part of the deal. high element of risk is involved.Why go public?? Before deciding whether one should complete an IPO. The rule is: Higher the risk. The significance of investing in IPO can be studied from 2 viewpoints ± for the company and for the investors. which help to attract top talent. it can even result in a higher rate of return. Both have a lot of risk involved. higher the returns.The company issues an IPO with its own set of management objectives and the investor looks for investment keeping in mind his own objectives.

No past track record of the company. This is seen as a good opportunity by µspeculative investors¶ looking to notch out some short-term profit. it can borrow cash or sell stock to raise needed funds. The risk factor can be attributed to the following reasons: Unpredictable. One of the most attractive features of an IPO is that the shares offered are usually priced very low and the company¶s stock prices can increase significantly during the day the shares are offered. "Going Public" is the best choice for a growing business for the following reasons: The costs of an initial public offering are small as compared to the costs of borrowing large sums of money for ten years or more. . THE RISK FACTOR Investing in IPO is often seen as an easy way of investing. there is also the possibility for appreciation of the share price due to market factors not directly related to the company. Potential of stock market. . it may decide to ³go public´. SIGNIFICANCE TO THE SHAREHOLDERS: The investors often see IPO as an easy way to make money. but it is highly risky and many Investment advisers advise against it unless you are particularly experienced and knowledgeable. It allows a company to tap a wide pool of investors to provide it with large volumes of capital for future growth. Or else. The capital raised never has to be repaid.SIGNIFICANCE TO THE COMPANY: When a privately held corporation needs additional capital. When a company sells its stock publicly. The µspeculative investors¶ are interested only in the short-term potential rather than long-term gains.

. i. basic risks and potential rewards associated with investing in an IPO.RISK ASSESSMENT: The possibility of buying stock in a promising start-up company and finding the next success story has intrigued many investors. Financial risk: Is this company solvent with sufficient capital to suffer short-term business setbacks? The liquidity position of the company also needs to be considered. Researching financial risk involves examining the corporation's financial statements. There are 3 kinds of risks involved in investing in IPO: Business risk : It is important to note whether the company has sound business and management policies. Therefore. which are consistent with the standard norms. Higher the desired returns.e. and other financial data. capital structure. researching market risk involves examining the appeal of the corporation to current and future market conditions. higher would be the risk involved. a thorough analysis of risk associated with the investment should be done before any consideration. the appeal of the IPO to other investors in the market. This has made Risk Assessment an important part of Investment Analysis. Hence. Researching business risk involves examining the business model of the company. Market risk: It would beneficial to check out the demand for the IPO in the market. .

the company offering it. Other investment options could also be considered depending upon the objective of the investor. It gives out the objectives and principles of the management and will also cover the risks. essential to measure the risks and take the decision accordingly. All that can be suggested is to µinvest at your own risk¶. research opinions emanating from the underwriters are invariably positive. Know your broker: This is a crucial step as the broker would be the one who would majorly handle your money.IPO INVESTMENT STRATEGIES: Investing in IPOs is much different than investing in seasoned stocks. prior to the offering. after the homework is done. There are some of the strategies that can be considered before investing in the IPO: Understand the working of IPO: The first and foremost step is to understand the working of an IPO and the basics of an investment process. Gather knowledge: It would be beneficial to gather as much knowledge as possible about the IPO market. It is therefore. Investigate before investing: The prospectus of the company can serve as a good option for finding all the details of the company. And immediately following the offering. . and the big step needs to be taken. The first step to getting IPO allocations is getting a broker who underwrites a lot of deals. This is because there is limited information and research on IPOs. Do not take a risk greater than your capacity. Invest at your own risk: Finally. IPO allocations are controlled by underwriters. the demand for it and any offer being planned by a competitor. Measure the risk involved: IPO investments have a high degree of risk involved.

PRINCIPAL STEPS IN AN IPO: y y Approval of BOD : Approval of BOD is required for raising capital from the public. The underwriter is legally allowed to support the price of a newly issued stock by either buying them in the market or by selling them short. Appointment of lead managers : the lead manager is the merchant banker who orchestrates the issue in consultation of the company. y Appointment of other intermediaries :      Co-managers and advisors Underwriters Bankers Brokers and principal brokers Registrars . The pricing of an IPO is a delicate balancing act as the investment firms try to strike a balance between the company and the investors. The process for determining an optimal price for the IPO involves the underwriters arranging share purchase commitments from leading institutional investors. The lead underwriter has the responsibility to ensure smooth trading of the company¶s stock. it should be high enough to raise sufficient capital for the company. There are many factors that need to be considered while pricing an IPO and an attempt should be made to reach an IPO price that is low enough to generate interest in the market and at the same time.PRICING OF AN IPO: The pricing of an IPO is a very critical aspect and has a direct impact on the success or failure of the IPO issue. PROCESS: Once the final prospectus is printed and distributed to investors. company management meets with their investment bank to choose the final offering price and size. The investment bank tries to fix an appropriate price for the IPO depending upon the demand expected and the capital requirements of the company.

with the required documents as per the companies act 1956. the company can proceed with its public issue. registrar. The quantity in which prospectus is printed should be sufficient to meet requirements. and the banks where the applications can be made. They should be send to the stock exchanges and brokers so they receive them at least 21 days before the first announcement is made in the news papers. the company should print the prospectus. . y Promotion of the issue : The promotional campaign typically commences with the filing of the prospectus with the registrar of the companies and ends with the release of the statutory announcement of the issue. If SEBI or public does not communicate its observations within 21 days from the filing of the offer document. the initial listing application must be made to the concerned stock exchanges with the listing fees. This must be published at least 10 days before the opening of the subscription list. y Printing and dispatch of prospectus : After the prospectus is filed with the registrar of companies. auditors. y Filing of initial listing application : Within 10 days of filing the prospectus. During the period the subscription is kept open.y Filing the prospectus with SEBI : The prospectus or the offer document communicates information about the company and the proposed security issue to the investing public. the prospectus signed by the directors. y Statutory announcement : The issue must be made after seeking approval of the stock exchange. All the companies seeking to make a public issue have to file their offer document with SEBI. y Filing of the prospectus with the registrar of the companies : once the prospectus have been approved by the concerned stock exchanges and the consent obtained from the bankers. the bankers will collect the applications on behalf of the company. underwriters and others. y Collections of applications : The Statutory announcement specifies when the subscription would open. when it would close. must be filed with the registrar of companies.

the liability of the underwriters has to be established. mergers. Liquidity: The shares once traded have an assigned market value and can be resold. This is extremely helpful as the company provides the employees with stock incentive packages and the investors are provided with the option of trading their shares for a price. Listing of the issue : The detail listing application should be submitted to the concerned stock exchange along with the listing agreement and the listing fee. The increase in the capital: An IPO allows a company to raise funds for utilizing in various corporate operational purposes like acquisitions. Valuation: The public trading of the shares determines a value for the company and sets a standard. Establishing the liability of the underwriters : If the issue is undersubscribed. research and development. The allotment formalities should be completed within 30 days. This works in favor of the company as it is helpful in case the company is looking for acquisition or merger. y y Allotment of shares : Proportionate system of allotment is to be followed. working capital. . y Major Advantages of IPO IPO has a number of advantages. IPO helps the company to create a public awareness about the company as these public offerings generate publicity by inducing their products to various investors. It also provides the share holders of the company with the present value of the shares. Increased wealth: The founders of the companies have an affinity towards IPO as it can increase the wealth of the company. without dividing the authority as in case of partnership. expanding plant and equipment and marketing.y y Processing of applications : Scrutinizing of the applications is done.

which are connected to the registering of an IPO. A major risk with shareholders is that. Such expenses might cost hundreds of US dollars. in order to launch an Initial Public Offering (IPO). A lot of expenses have to be incurred in the form of legal fees. and also approvals from them while of that company is going down. The primary owners of the company or the people holding maximum authority in the company cannot take decisions all by themselves once an IPO has been launched and shareholders have been formed. if not handled with efficiency. They have their individual demands to be met as they own a certain percentage of stakes in the company.Drawbacks of IPO Making important business decisions. prove to be some major drawbacks related to the launch of IPOs. Besides. there are other factors as well that should be taken into consideration by the company while introducing an IPO. the CEO of the company would have to spend a lot of time in handling the SEC regulations or sometimes he hires experts to do the same. All these aspects. The shareholders have an active participation in every decision that is being taken even if they do not hold 50 percent share of the company. in case they see the price band of the stakes It is true that IPO raises huge capital for the issuing company. . they can sell off their stocks any time they want. A continuing expenditure has to be incurred after the setting up of an IPO by the parent company. This will lead to a further drop of the value of shares in the market which in turn will decrease the overall value of the company. the expenses become a routine in every activity involved. Setting up an IPO does not always lead to an improvement in the economic performance of the company. printing costs and accounting fees. Apart from such enormous costs. meetings. The launch of IPO also brings about shareholders of the company. After the IPO is introduced. But. The SEC regulations require notifications from the shareholders of the company. Such factors include the rules and regulations involved to set up public offerings and this entire process on the other hand involve a number of complexities which sometime require the services of experts in relevant fields. Shareholders have ownership in the company. it is also necessary to make certain investments. Some companies hire experts to do the needful to ensure a hassle-free execution of the task.

4 .Part 1.

SSKI¶s institutional broking arm accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all Domestic Institutional portfolio investment in the country. Far East. UK and US. Earlier with a legacy of more than 80 years in the stock markets.COMPANY PROFILE : Share khan is one of the leading retail brokerage of City Venture which is running successfully since 1922 in the country. NSE. The content-rich and research oriented portal has stood out among its contemporaries because of its steadfast dedication to offering customers best-of-breed technology and superior market information. Foreign Institutional Investors generate about 65% of the organization¶s revenue. Derivatives. It has 60 institutional clients spread over India. online trading. depository services. SSKI holds a sizeable portion of the market in each of these segments. The objective has been to let customers make informed decisions and to simplify the process of investing in stocks Mission : ³To educate and empower the individual investor to make better investment decisions through  QUALITY ADVICE  INNOVATIVE PRODUCTS and  SUPERIOR SERVICE´. SSKI is one of the leading players in institutional broking and corporate finance activities. Share khan offers its customers a wide range of equity related services including trade execution on BSE. which has over eight decades of experience in the stock broking business. with a daily turnover of over US$ 2 million. the SSKI group ventured into institutional broking and corporate finance 18 years ago. investment advice etc. . Earlier it was the retail broking arm of the Mumbai-based SSKI Group.

The number of trading members currently stands at over 7 Laces. . Gujarat Papaya. Hutchison. The City Venture holds a majority stake in the company. sector tapped etc. In the last six months Speed Trade has become a de facto standard for the Day Trading community over the net. like Sun Microsystems. to build its trading engine and content. The Corporate Finance section has a list of very prestigious clients and has many µfirsts¶ to its credit. Share khan alone accounts for 27 per cent of the volumes traded online. Nexgenix.com . HSBC. Oracle. and Shopper¶s Stop. 2002 Share khan launched Speed Trade and Trade Tiger. are net-based executable application that emulates the broker terminals along with host of other information relevant to the Day Traders. Spider Software Pvt. Intel & Carlyle are the other investors. in terms of the size of deal. The group has placed over US$ 5 billion in private equity deals. Essar.sharekhan. Known for its jargon-free.WORK STRUCUTRE OF SHAREKHAN Share khan has always believed in investing in technology to build its business. The firm¶s online trading and investment site www. Share khan¶s ground network includes over 700+ Share shops in 130+ cities in India. Some of the clients include BPL Cellular Holding. Ltd. The site gives access to superior content and transaction facility to retail customers across the country. The company has used some of the best-known names in the IT industry.was launched on Feb 8. On April 17. VignetteVeriSigngn Financial Technologies India Ltd. Cambridge Technologies. This was for the first time that a net-based trading station of this caliber was offered to the traders. Share khan shifted hands and City venture get holds on it. While online trading currently accounts for just over5 per cent of the daily trading in stocks in India. Finally. investor friendly language and high quality research. Planetasia. Microsoft. 2000. the site has a registered base of over 3 Laces customers.

6-Forex . 4. 3.Insurance Distribution.Mutual Fund Advisory and Distribution.Commodities Trading Platform (Online/Offline).Portfolio Management Service.PRODUCT AND SERVICES OFFERD BY SHAREKHAN 1. 2. 5.Equity Trading Platform (Online/Offline).

 Provision to enter price trigger and view the same online in market watch. Features  Online trading account for investing in Equity and Derivatives via www.  Instant order and trade confirmation by E-mail. . It is ideal for active traders and jobbers who transact frequently during day¶s session to capitalize on intraday price movement.com  Live Terminal and Single terminal for NSE Cash.  Single screen interface for Cash and derivatives and more. TRADE TIGER TRADE TIGER is an internet-based software application that enables you to buy and sell in an instant.com and is suitable for the retail investors who is risk-averse and hence prefers to invest in stocks or who does not trade too frequently.   Streaming Quotes (Cash & Derivatives).sharekhan.  Competitive transaction charges.  Instant cash transfer facility against purchase & sale of shares.Share khan offers the following products:CLASSIC ACCOUNT This is a User Friendly Product which allows the client to trade through website www. Saving Bank and Demat Account.sharekhan.  Integration of On-line trading. Personalized market watch. NSE F&O & BSE.

3970-7500. buyingselling shares through a mobile phone are not yet permitted. Market summary (Cost traded scrip. Multiple Charting. DIAL-N-TRADE Along with enabling access for trade online.) Hot keys similar to broker¶s terminal. Single screen trading terminal for NSE Cash. Research & Advice and Trading Calls live on the Mobile. tic-by-tic charts. Beside this. highest clue etc. Relationship Managers are always available on Office Phone and Mobile to resolve customer queries. Technical Studies. Intra Day Charts.) . SHARE MOBILE Share khan had introduced Share Mobile. Back-up facility to place trades on Direct Phone lines. mobile based software where one can watch Stock Prices. Live market debts. NSE F&O & BSE. (As per SEBI regulations. Alerts and reminders. the CLASSIC and SPEEDTRADE ACCOUNT also gives Dial-n-trade services. Real-time streaming quotes.Features           Instant order Execution and Confirmation. one can dial Share khan¶s dedicated phone lines 1800-22-7500. With this service.

This is quite hassle-free. Simply allocate fund to IPO Account. Now their customers can have a Zero Balance Saving Account with ICICI Bank after your demat account creation with Share khan.Rs. Sundaram. 2000 Prepaid Speed trade Account: . PRINCIPAL and TATA with Share khan. . Zero Balance ICICI Saving Account Share khan had tied-up with ICICI bank for Zero Balance Account for Share khan¶s Clients. Prepaid Classic Account: . paperless and time saving. DSP Merrill Lynch. Beside this. Franklin Templeton Investments. SBI. 6000 IPO ON-LINE Customers can apply to all the forthcoming IPOs online. Apply for the IPO and Sit Back & Relax. great discount are also available (up to 50%) on brokerage. Birla. ICICI Prudential.PREPAID ACCOUNT Customers pay Advance Brokerage on trading Account and enjoy uninterrupted trading in their Account. Mutual Fund Online Investors can apply to Mutual Funds of Reliance.Rs. HDFC.

SSKI won the 'India's best broking house for 2004' award. Technology With their online trading account one can buy and sell shares in an instant from any PC with an internet connection. . They have a dedicated call-center to provide this service via a Toll Free Number 1800 227500 & 39707500 from anywhere in India. TOOLS AND EXECUTION services for investors. Customers get access to the powerful online trading tools that will help them to take complete control over their investment in shares.sharekhan. www.com. Convenience One can call Share khan¶s Dial-N-Trade number to get investment advice and execute his/her transactions. Knowledge In a business where the right information at the right time can translate into direct profits. In the Asia Money broker's poll held recently.sharekhan. Accessibility Share khan provides ADVICE. over the Internet (through the website www. investors get access to a wide range of information on the content-rich portal. Investors will also get a useful set of knowledge-based tools that will empower them to take informed decisions.REASON TO CHOOSE SAHREKHAN LIMITED Experience SSKI has more than eight decades of trust and credibility in the Indian stock market. EDUCATION.com) as well as over the Voice Tool. These services are accessible through many centers across the country (Over 650 locations in 150 cities). Ever since it launched Share khan as its retail broking division in February 2000. it has been providing institutionallevel research and broking services to individual investors.

com. Buy or sell even single share  Anytime Ordering. Live Chat facility with Relationship Manager on Yahoo Messenger  Special Personal Inbox for order and trade confirmations.  24x7 Voice Tool access to your trading account. demat and other queries. Investment Advice Share khan has dedicated research teams of more than 30 people for fundamental and technical research.sharekhan. On-line Customer Service via Web Chat.  Automated Portfolio to keep track of the value of your actual purchases.  Secure Order by Voice Tool Dial-n-Trade. online chat. . Their customer service can be contacted via a toll-free number.Customer Service Its customer service team assist their customer for any help that they need relating to transactions.      Personalized Price and Account Alerts delivered instantly to your Mobile Phone & E-mail address. Benefits  Free Depository A/c  Instant Cash Transfer  Multiple Bank Option. printed reports etc. billing. Their analysts constantly track the pulse of the market and provide timely investment advice to customer in the form of daily research emails. Enjoy Automated Portfolio. email or live chat on www.

.As the firm SHARE KHAN .plays the role of leading financial services providing company. The analysis of this helps the investors in making a better investment decision .NEED FOR THE STUDY: A script performing in the primary market is essentially monitored. there is a need for them in analyzing the performance of scripts in the primary market. the factor that are to be monitored offer price.

y The study aims to find out the profitable issues among the total issues passes out during the period. y The scope lies in determine the future prospectus for the investor in making investment decision. .SCOPE OF THE STUDY. y The study provides a comprehensive overview of performance of script in the primary market.

y To know the market rate of return for the same period. y To find out the profitable issues among the total issues passed out during the period.OBJECTIVES . y To determine the future prospectus for the investor in making investment decision. y To understand the Benefits to investor from IPOs . y To analyze the performance of IPO over certain period(3 YEARS).

they do not guarantee future performance and growth. The study has been focused only on performance of script in primary market.LIMITATIONS. window dressing can be made in balance sheet in order to attract. Only past performance are considered for the study. . y Investor may not get the preferred number of units as the allocation is based on random draw. y y y The study has been limited to a period of 4 years. y Only companies previous track record is being considered in case investing decision.

Reserve Bank of India. y The post-offering performance of IPOs in the Indian banking industry Saurabh Ghosh . 12. This study concentrates on IPOs from the banking sector of an emerging economy. in some cases in unpredictable ways. WALTERS . India. the role of the banking sector for economic development is undisputed. We draw on theories of entrepreneurial firms to explore the impact of top management team (TMT) board control on holding period returns (HPRs). based on key accounting parameters. even when TMT board control was optimal. No. this paper analyses the post offering performance of banking sector IPOs in detail. Monetary Modelling Unit. In the literature. 89±94. Further.MARK KROLL Louisiana Tech University PETER WRIGHT University of Memphis Academy of Management Journal 2010. Mumbai-400001. NCOB. increased dramatically as it rose from 50 to 75 percent (the ³optimal´ range). HPRs increased modestly as TMT board membership rose to 50 percent.REVIEW OF LITERATURE. 572±595. The performance evaluation on the basis of stock returns did not find significant evidences of underperformance for the IPOs from the banking sector. found improvement in the performance of the banks in the post-listing period. There were no significant differences across ownership groups (public sector banks visa`-vis their private counterpart) in the IPO performance. 53. 2005. Vol. In view of its importance in economic resource allocation and its distinction from other industries in general. In a developing country. . Monetary Policy Department. and decreased materially as it rose beyond 75 percent. y THE IMPACT OF TMT BOARD MEMBER CONTROL ANDENVIRONMENT ON POST-IPO PERFORMANCE BRUCE A. We posit a complex relation between a firm¶s performance after initial public offering (IPO) and the proportion of TMT members on its board. environmental conditions influenced the focal relationship. the underperformance of IPOs is a well-documented empirical anomaly. 3. India. Applied Economics Letters. the study. Moreover.

and (2) the structural changes in IPO pricing before and after deregulation in 1996. pp. These results support the predictions of signaling theory for the IPOs listed in the Indian stock markets over the last decade. 41. This paper attempts to identify the factors explaining under pricing of initial public offerings (IPOs) in an emerging economy. November±December 2005. under pricing was less during the high volume (hot) period compared to the slump period in the Indian IPO market. Small issues belonging to private stand-alone firms had less under pricing during the hot period and did not come to the market subsequently to raise funds.00. ISSN 1540±496X/2006 $9. India. 6. new issues belonging to business groups underpriced more than their stand-alone counterparts did. Sharpe. underpriced more and subsequently raised funds from the market. Inc. y IPO Valuation. on the other hand. the evidence points to the paradoxical role of the IPO profit guarantees. Governance & Society 1. 1-24 (2006) The paper examines (1) the valuation impact of IPO profit guarantee as an investor protection tool.842 companies that got listed on the Bombay Stock Exchange from 1993 to 2001. It is found that uncertainty played a role in perverse under pricing in the Indian primary market. using 1. vol.50 + 0. 45±57. .E. Investor Protection and Deregulation: Evidence from Bursa Malaysia WAN NORDIN WAN HUSSIN. no. All rights reserved.y Underpricing of Initial Public Offerings The Indian Experience SAURABH GHOSH Emerging Markets Finance and Trade. © 2006 M. Universiti Utara Malaysia The International Journal of Accounting. Large issues belonging to the business groups. Contrary to the international evidence. Based on a sample of 251 IPOs during 1994-2000. During the hot period. IPOs with a large issue size and those that went for seasoned offerings had less under pricing.

33:437] Recent events are replete with stories of fraudulent or opportunistic behavior in the initial public offering (IPO) process²behavior that extended to the highest-reputation investment banks. cannot comfortably be categorized as certification. the evidence also lends support to Habib and Ljungqvist (2001) entrepreneurial wealth losses minimisation hypothesis. however. together with other recent results in the legal literature. However. y CORRECTING REGULATION THE EMPIRICAL FOUNDATIONS OF IPO-PRICING ROYCE DE ROHAN BARONDES* FLORIDA STATE UNIVERSI TY LAW REVIEW [Vol. they factor in their IPO participation ratio in the pricing decision. in the aftermath of the crisis. This Article develops new empirical evidence that casts doubt on this ³certification´ hypothesis by examining the pre-IPO price adjustment of IPOs involving qualified independent underwriters (QIUs). recent financial economics literature asserts investment bank conflicts of interest ³certify´ IPO issuers. support the view that factors other than ³certification´ account for IPO-pricing phenomena in IPOs involving investment bank conflicts of interest. Comparing IPO pricing before and after liberalisation. notwithstanding this evidence. to repay a prior extension of credit).particularly IPOs in which more than ten percent of the net proceeds are being directed to participating investment banks (for example. Curiously. . investors are willing to pay more for the IPO shares the more the controlling shareholders guaranteed the forecasted profits. IPO profit guarantees no longer affect IPO valuation. Investment bank exit. When IPO entrepreneurs are given the freedom to set the IPO price without interference from the regulator. These results.Prior to the Asian financial crisis in the third quarter of 1997. These offerings have similar preIPOpricing patterns to those others interpret as involving certification.

we suggest that holding a portfolio consisting of glamour venture-backed stocks listing for about six years is a profitable strategy.The SEC is finally considering important proposals put forward by the NASD and the NYSE to reform IPO marketing.The Journal of Investing Winter 2008. Chia-Yu Chang. About six years after the IPOs.17. These results support increased disclosure-focused regulation of the IPO process. y An Investment Strategy Based on the Long-Run Performance of IPOs: VentureBacked and Non-Venture-Backed Firms Junming Hsu. however.4. albeit five years after the internet bubble in IPOs and other securities transactions burst.095 This study investigates the evolution and long-run performance of venture-backed and nonventure-backed firms after the initial public offerings (IPOs). 95105 DOI: 10. We also find that venture-backed firms with glamour performance from year 2 to year 5 after the IPOs tend to maintain good performance from year 6 to year 9. This result supports our hypothesis that the entrepreneurial ability of venture-backed firms lasts for a long period. We hypothesize that the entrepreneurial ability enables venture-backed firms to keep a good performance in the long run. with venture-backed firms outperforming non-venture-backed firms.2008. with venture-backed firms showing superior performance. 17. No. . Vol.3905/JOI. The results show that firms underperform the market over the five years following the IPOs. firms still alive outperform the market. Putting these results together. 4: pp.

The companies benefited because their stock price rose. a critical eye turned to securities industry practices. a transaction known as spinning. few people could understand what pushed the markets so high when the tech stocks that lead the charge had nothing to show in the way of profits.6 The alleged effect was that small investors were misled by these optimistic recommendations. banks doled out initial public offering (IPO) shares to exchange for prior or continued investment banking company executives purportedly in business.8 Overly optimistic stock analysis created artificial demand. the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE).Investment Banking Conflicts: Research Analysts and IPO Allocations PHILLIPKENNEDY(PP199-238).DOC As investors sobered up from the ³irrational exuberance´ of the tech stock bubble.2 The answer seemed to be that research analysts consistently were bullish on many stocks and remained so even as the bubble burst and the market price of many of those same stocks plunged.7 In addition. In exchange.10 Following New York¶s lead. Merrill Lynch entered into a $100 million settlement in May of 2002 that restricted interactions between its research analysts and bankers. the Securities and Exchange Commission (SEC) approved proposed rule changes for two self-regulatory organizations (SROs). the banksn benefited when they received large investment banking fees for services provided to those companies.3 What explains the analysts¶ behavior? Some charge that research analysts of the major investment banking firms created the stock boom by hyping the stock of companies for which their investment banks had provided or were seeking to provide investment banking services. Eliot Spitzer. and then lost out when the stocks eventually tumbled. After an investigation by New York¶s Attorney General. . which investors assumed were objective. allowing executives to reap huge profits during the tech stock boom days of the late 1990s when they sold those IPO stocks almost immediately.1 In hindsight.

91% Accesories sector provides an average listing return of 4.09%.62% Realty sector provides an average listing return of 15.4. .59% IT sector provides an average listing return of 26.it provided 177.e. Worst listing day return is been provided by Retail & power (1. Engineering & Realty are the unattractive sectors for investment.38% resp) One year holding perspective Media provides a good return when compared to other sector. y y IT is the most attractive sector for investment from the analysis made. y y y Two year holding perspective IT provides a good return.51% Bank sector provides an average listing return of 24. Mining &IT sector provides better listing day return i.09% Most number of IPO¶s came from realty sector (21). y y y y y y y y y y y y y y Pharma sector provides an average listing return of 13. y Worst listing day return by individual stock is by Chemcel biotech .25% Power sector provides an average listing return of 4.75% return. Three year holding perspective IT provides a good return. Best listing day return by individual stock is by Lotus health care .12% Engg & metal sector provides an average listing return of 26.5% Mining sector provides an average listing return of 32.5% return.FINDINGS.27% resp.25%.38% Media sector provides an average listing return of 8.32.it provided -34.97% Retail sector provides an average listing return of 1.

IPO provides a better short term return when compared to other investments.Engg&metal sector for long term. y y . The aggregate listing day return provided by all sectors are positive therefore it is better advised to exit on listing day and reenter at lower levels y y y IT & Bank proves to be a good investment strategy for long term perspective.SUGGESTION. Investors are suggested not to invest in Realty.

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