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Title Long-Term Risk-Adjusted Performance of Indian IPOs
Authors Soumya Guha Deb & Banikanta Mishra
Type Working Paper
Publication Date 13-Sep-2012
Year 2012
Abstract In this paper, we studied a variety of issues – especially long term performance - pertaining to 184 IPOs in India during April 2001 and March 2009. We found that there is, on the average only, significantly positive return on the listing-day and the day following that, which gets reversed – but not annulled - within ten days. When we group the firms into two groups based on whether they yielded positive or negative absolute return, many new insights are obtained. Not only does the 50%-plus day-0 average Ri for the former group is in sharp contrast with the -14% day-0 Ri for the latter, but we found that the positive group does not gain anything from an up-market preceding the IPO, whereas a down-market is a major cause for the poor listing-day
performance of the negative group. Positive-group IPOs also experience significant intra-day volatility in the after-market up to thirty days and it is the reverse for the negative group; but, whereas the negative group’s day-0 Ri is related to its post-IPO standard-deviation of returns in the after-market, they are unrelated for the positive group. Even the average holding-period return of the negative group (starting day-1, not day-0) becomes significant only after four years, while it is positive throughout for the positive group. Corresponding CARs - from day-1 onwards – continue to be positive for the positive group throughout and negative for the negative group up to two years, becoming statistically zero thereafter. Overall, in the long-run, however, a random IPO portfolio only yields a return equal to the market, if we ignore the day0 abnormal return. Unlike most other studies, we adjusted for risk of an IPO by taking its post-issue risk, assuming that the market had rationally anticipated how risky a share would be after the IPO. We measured risk by the CAPM-Beta, LPM (Lower Partial Moment)-Beta, Variance Ratio, and LPM2 (LPM of Order 2)-Ratio. We measured abnormal return by CAR (Cumulative Abnormal Return), where AR (Abnormal Return) was determined in a variety of ways, using the above risk measures – not all of which have been traditionally used by other researchers – and different models like the Market Model, CAPM, and LPM-CAPM.

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