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

Kavitha Ranganathan and Aayush Saraogi

Journal of Behavioral and Experimental Finance, 2021, vol. 32, issue C

Abstract: 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 oversubscription, and IPOs without discretionary allocation. Consistent with investor sentiment, oversubscription 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.

Keywords: Initial Public Offerings (IPOs); Voluntary underpricing; Sentiment returns; Underwriter reputation; IPO regulation (search for similar items in EconPapers)
JEL-codes: G15 G18 G24 G32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S221463502100109X

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:32:y:2021:i:c:s221463502100109x

DOI: 10.1016/j.jbef.2021.100565

Access Statistics for this article

Journal of Behavioral and Experimental Finance is currently edited by Michael Dowling and Jürgen Huber

More articles in Journal of Behavioral and Experimental Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().