Sentiment Traders & IPO Initial Returns: The Indian Evidence

We use India\u27s unique regulatory design to test sentiment-based models of IPO initial returns. Using a sample of 362 Indian offerings from 2003 to 2014, we find that the traditional measure of IPO underpricing averages 23%. We decompose the traditional underpricing measure into two components: one related to voluntary underpricing by the underwriter and the other component related to the IPO\u27s first-day trading activity. We find minimal levels of voluntary underpricing. However, initial returns on the first day average 14% and are primarily driven by the unmet demand of non-institutional investor groups. Overall, our results support sentiment-based models of IPO initial returns

Subscription patterns, offer prices and the underpricing of IPOs

Abstract Certain unique characteristics of the Indian bookbuilding process allow us to study the timing and subscription pattern of different investor groups and to dissect underpricing into two distinct components: one relating to pre-listing, set by the underwriter and the other from the post-listing period, which is determined by the market. Our results show the presence of sequential learning among IPO investors. Retail and Non-institutional investors follow the Institutional investors' subscription patterns when bidding for shares. The transparency of the bookbuilding process in the Indian IPOs helps alleviate the winner's curse problem for the noninstitutional and retail investors. We also show that market underpricing is primarily driven by the unmet demand of the non-institutional investor groups. This insight is unprecedented in the IPO literature. JEL Classification: G11, G15, G1

Warrants in underwritten IPOs: The Alternative Investment Market (AIM) experience

We examine the use of warrants as a part of underwriter compensation in IPOs listed on the Alternative Investment Market (AIM) of the London Stock Exchange. Our results show that, though warrant-issuing IPO firms are riskier, they are usually underwritten by reputable underwriters. Firms that are cash constrained at the time of their IPO are more likely to use warrants. Both market volatility and hot issue markets increase the likelihood of firms issuing warrants. We also find that warrant issuers are able to minimise their total costs of going public, even under a very light regulatory setting with regards non-cash compensation. They incur actual costs of 29.1%, but would have incurred greater costs of 33.8% had they not issued warrants to their underwriters. Overall, our results support the cost minimisation explanation of the use of warrants by UK IPO firms