What explains voluntary premarket underpricing and aftermarket mispricing in Indian IPOs?

Ranganathan, Kavitha and Saraogi, Aayush (2021) What explains voluntary premarket underpricing and aftermarket mispricing in Indian IPOs? Journal of Behavioral and Experimental Finance, 32.

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Official URL: https://doi.org/10.1016/j.jbef.2021.100565


Using a unique regulatory design from the Indian IPO setting, this paper decomposes traditional underpricing (offer-to-close return) into voluntary premarket and aftermarket mispricing. This separation allows us to test propositions from information asymmetry-based and behavioral theories that explain IPO underpricing. Our results show that underwriter reputation is significantly related to greater voluntary underpricing in the premarket. This relation is more pronounced for small firms,institutional over subscription, and IPOs without discretionary allocation. Consistent with investor sentiment, over subscription by retail investors and market momentum is positive and significantly related to initial returns in the aftermarket. Further, our results support that premarket transparency reduces the winner’s curse for retail investors in the post-listing period. Overall, the findings suggest that information-based factors explain premarket voluntary underpricing, whereas, behavioral factors are significantly related to aftermarket mispricing. Our results are robust to endogeneity concerns

Item Type: Article
Uncontrolled Keywords: Initial Public Offerings (IPOs); Voluntary Underpricing; Sentiment returns; Underwriter reputation; IPO regulation
Subjects: Finance
Finance > Financial Management/Corporate Finance
Divisions: Finance and Strategy
Depositing User: Mr. Muralidhara D
Date Deposited: 27 Sep 2021 09:48
Last Modified: 27 Sep 2021 09:48
URI: http://tapmi.informaticsglobal.com/id/eprint/747

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