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During the past two decades, numerous Indian firms have gone public by undertak-
Executive ing Initial Public Offerings (IPOs) of their equity shares. Yet, many other Indian firms
Summary have intentionally chosen to remain private even though they fulfill the eligibility
criteria of going public. This raises the question as to what are the determinants of
firms’ going-public decision.
While researchers have propounded several theories to explain the firms’ going-pub-
lic decision, yet the empirical studies conducted to test the proposed theories are still
scarce, mainly due to lack of data on privately held firms necessary for a direct inves-
tigation of the choice between going public and remaining private. None of the exist-
ing studies have assessed the determinants of Indian firms’ going-public decision.
Besides, no consistent stylized facts have so far emerged. Rather contradictory find-
ings have been reported in some of the existing studies. Further these individual stud-
ies have not been comprehensive as each of them has focused only on a limited number
of determinants.
This study investigates the determinants of going-public decision of the Indian firms,
juxtaposing the following two related research issues:
The preceding research issues are examined using two independent analyses. First, a
panel probit regression analysis is done to identify the ex-ante characteristics of go-
ing-public Indian firms that differentiate them from those Indian firms that continue to
remain private even though they fulfill the eligibility criteria of going public. This
analysis reveals that going-public Indian firms tend to be younger, riskier, transpar-
ent, more profitable, experiencing higher sales growth, and larger-sized than firms
that decide to remain private. Also if a firm belongs to retail trade sectors, it increases
its probability to go public. In the second analysis, ex-post consequences of IPOs on
KEY WORDS firm characteristics are examined by comparing pre-IPO characteristics of IPO firms
with their post-IPO characteristics using Wilcoxon two-sample signed rank test. This
Initial Public Offerings analysis suggests that Indian firms go public to:
Going-Public Decision • finance their growth and investments
Emerging Market • diversify owners’ risk
• rebalance their capital structure
India • bring down their borrowing rates.
1 We take the meaning of IPO and going public as the same. Survey-Based Studies
2 All the Tables are given in Appendix. Brau and Fawcett (2006) conducted a managerial survey
3 The research design of these studies has mostly been probit analy-
sis. This study uses a similar research design. There is another set of
of 336 CFOs of the US firms which hitherto either (a) had
research studies which has used survey research design (Brau & successfully completed their IPO; or (b) had initiated their
Fawcett, 2006; Brau, Ryan & DeGraw, 2005, etc). This study does
IPO process but later on chose to call off their IPO; or (c)
not follow survey research design.
Cost of credit is used to measure the cost of credit of the RESULTS AND DISCUSSION
firms. The literature review indicates that IPOs help firms
Summary Statistics
in bargaining for a lower cost of credit from the banks.
Therefore, a significant decrease in ‘Cost of credit’ is an- The annual trend in the number of IPOs and capital raised
ticipated in the post-IPO period. by Indian firms through IPOs are shown in Table 1. The
spurt in the IPO activity between 1991 and 1996 is attrib-
Beta (accounting beta) is used to examine the cost of capi-
utable to the structural changes in the political economy
tal of firms in the post-IPO period. The literature review
of India, primarily through the economic liberalization
indicates that firms go public to reduce their cost of capi-
initiatives of the Indian Government from 1991 onwards.
tal. Therefore, a significant decrease in ‘Beta’ is antici-
The later part of period between 1991 and 1996, however,
pated in the post-IPO period.
witnessed several instances of fake IPOs and fly-by-night
entrepreneurs, which eroded the investors’ wealth and
Data Sources and Sample
7 The firms in private sample were selected on the basis of general
The pre-IPO determining factors were analysed by ap-
eligibility criteria to do an IPO like net tangible assets of at least `
plying probit regression model where the data for both 5 crore in each of the preceding three years, distributable profit for
private and public firms were required. For public firms, the last three years and net worth of at least ` 1 crore in each of the
preceding three years.
the sample was derived from 521 public firms that went 8 During this period, SEBI enforced restrictions on promoters, such
public between 1997 and 2007. For private firms, the as the lock-in period for their holdings. In 1995, SEBI appointed
sample was derived from a total of 18,000 unlisted firms Malegam Committee to recommend appropriate regulations for
closer scrutiny of proposed offerings. See Marisetty and
whose information was recorded in CMIE Prowess. The Subhrahmanyam (2008), Shah & Thomas (2001) and Rao (2002)
sample for private firms included only those unlisted firms for more details.
Table 1: Number of IPOs and Amount raised by Indian Companies from 1989 to 2008
Note: The Table presents the IPO activities in India from 1989 to 2008. The sample in the present study is taken from this total population
of IPOs. The table shows the annual number of public issues and amount raised by Indian companies in the given time period.
Research Study Pagano, Boehmer & Albornoz Chemannur, Chorruk & Chun, Overall
Panetta & Ljungqvist & Pope He & Worthington Lynch &
Zingales (2004)a (2004) Nandy (2010) Smith
(1998) (2005)b (2002)
Sample firms (IPOs/ Private) 69/12391 330 IPO firms 830/9968 1315/2578 110/5118 304/1722
Country Italy Germany UK US Thailand Korea
Country Category Developed Developed Developed Developed Developing Developing
Ex-ante results
Statistical Technique Multiv. Multiv. Multiv. Multiv. Multiv. Multiv.
(Probit) (Cox) (Logistic) (Probit) (Probit) (Probit)
Explanatory variables
Size +* +* +* +* +* A+
Age + +* –* M+/–
Profitability +* +* –* +* – –* M+/–
Asset Risk +* A+
Cost of Credit + N
Leverage – –* –* + M–
Bank Rate – –* – M–
Market-Book Ratio +* – +* + M+
Growth +* + +* – +* M+
Research Study Pagano, Boehmer & Albornoz Chemannur, Chorruk & Chun, Overall
Panetta & Ljungqvist & Pope He & Worthington Lynch &
Zingales (2004)a (2004) Nandy (2010) Smith
(1998) (2005)b (2002)
Capital Expenditure + + +* M+
Investments – –* M–
Index Volatility + N
Publicity/Coverage +* +* A+
Total Factor Productivity +* A+
Ex-Post results
Statistical Analysis Univariate
Sales + – A +/–
Profitability – + – – A +/–
Capital Expenditure – + A +/–
Leverage – – – A–
Investments 0 0 – N
Payout 0 N
TAX 0 N
Growth 0 + – + – M +/–
Interest Rate – + – A +/–
Ownership – A–
Size – A–
Covergae – A–
Total Factor Productivity – A–
Notes: * Significance at 1-10%, + Positive relationship, – Negative relationship, 0 - No relationship
A Always significant, M Mixed results, N Always not significant
a Boehmer & Ljungqvista also used product market charateristics
b Chemannur, He & Nandy also included industry-specific and macro-economic factors
Note: This Table summarizes the results of studies which have adopted similar approach that we have followed (for discussion on studies on
different approaches, see literature review section). Ex-ante determinants are discussed first, followed by Ex-post determinants. For
Ex-post determinants, only those studies are considered that focused on post IPO determinants (a few studies adopted similar approach
to examine the impact of IPO on performance and other variables; see Mayur and Kumar (2009) for summary of such studies). Other
characteristics of studies like sample size, year, study area, country category, and statistical technique used are also presented in the
table.
Note: This Table presents the results of maximum likelihood estimate of probit model used to investigate the determinants of going-public
decision of firms in the period 1999 to 2006. Model 1 is a simple probit estimation of probability of going public. Model 2 controls for
inter-industry effect and Model 3 controls for year effect. In order to control for industry effect and year effect, one way random effect
model was used where the differences in industry group and year group was assumed to be because of random effect. The
nomenclature of dependent variable is ‘IPO’, a dummy variable, which equals 1 if the company is publicly held and 0 if the company
is a private in a particular year. The explanatory variables are: the size, age, sales growth, profitability, level of disclosures, asset risk,
leverage, industry market to book value and market risk of the included companies. Detailed definitions of all variables are given in
Table 4. The number represents the coefficient in the probit regression model. Standard errors are reported in the parentheses.
Number of observations, log likelihood and χ2 for the model are also reported in the Table.
Variables Median Change (%) Median Change (%) Median Change (%)
from IPO-1 to IPO from IPO-1 to IPO+1 from IPO-1 to IPO+2
Promoter’s ownership -0.01*** -3.14*** -4.24***
(-5.822) (-7.378) (-8.092)
Debt to equity -19.35*** -51.95*** -36.40***
(-4.543) (-7.992) (-4.473)
Capital expenditure 57.993*** 138.844*** 138.191***
(-4.72) (-5.81) (-5.92)
Investments 17.70*** 284.75*** 346.47***
(-7.40) ( -10.62) ( -11.58)
Cost of credit -9.76* -31.34* -65.19***
(-0.68) (-1.21) (-3.28)
Beta -0.62 -6.55 -12.61***
(-.55) (-.13) (-2.87)
The sign ***, ** and * indicate significant at 1%, 5% and 10% respectively.
Note: The above Table presents the median changes (percentage) in variables of Indian firms around their IPOs. The changes are analysed
for the following three time windows: (i) one year before IPO (Y-1) to IPO year (Y+0), (ii) one year before IPO (Y-1) to one year after
IPO (Y+1), and (iii) one year before IPO (Y-1) to two year after IPO (Y+2). The test for differences between the two groups is performed
using the Wilcoxon two-sample signed rank test, which assumes that the observations are independent. Z statistics are shown in
parentheses.
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Manas Mayur is a member of the Faculty of Finance at the Manoj Kumar is a member of the Faculty of Finance & Ac-
Goa Institute of Management, Goa. He obtained his Masters counting at the Indian Institute of Management, Rohtak. He
from the Forest Research Institute, Dehradun and a Ph.D. from has taken a Ph.D in Finance from IIT Bombay. He has pub-
GGSIP University, Delhi. This paper is based on his doctoral lished research papers in journals of national and interna-
work. Besides publishing papers in the ICFAI Journal of Ap- tional repute like, Journal of Financial Services Marketing, Vikalpa,
plied Finance, he has contributed research papers and cases in Management Review, Journal of Modern Accounting and Audit-
several edited volumes. He has also presented papers at sev- ing, Bombay Stock Exchange Review, Indian Management, and
eral international and national level conferences. His area of ICFAI Journal of Applied Finance. He has contributed research
specialization is Accounting and Finance. papers in several edited volumes. He has also presented pa-
pers and chaired sessions at several international and na-
e-mail: manasmayur@gim.ac.in tional level professional conferences. His area of specialization
is Accounting and Finance.
e-mail: manoj.kumar@iimrohtak.ac.in.