IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v91y2024ics1057521923005124.html
   My bibliography  Save this article

The effect of lead institutional investors on investment and capital structure of young firms: Evidence from Indian IPOs

Author

Listed:
  • Sharma, Aarti
  • Singhal, Ankit
  • Ramanna, Vishwanatha Saragur

Abstract

We study the consequences of an exogenous event, a regulation that allows IPO firms to seek investment from lead institutional investors in India. We document a significant increase in IPO volume as a result of the regulation. Post-regulation, lead-investor backed firms experience a reduction in issuance cost, an increase in capital investments and a decrease in leverage. The effects on investments and leverage are significant for high growth and financially constrained firms. Financially constrained firms backed by lead investors raise 26.4% more equity than unconstrained firms. Our findings provide evidence that discretionary allocation of shares to lead institutional investors could reduce capital constraints.

Suggested Citation

  • Sharma, Aarti & Singhal, Ankit & Ramanna, Vishwanatha Saragur, 2024. "The effect of lead institutional investors on investment and capital structure of young firms: Evidence from Indian IPOs," International Review of Financial Analysis, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:finana:v:91:y:2024:i:c:s1057521923005124
    DOI: 10.1016/j.irfa.2023.102996
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521923005124
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2023.102996?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Michala, Dimitra, 2019. "Are private equity backed initial public offerings any different? Timing, information asymmetry and post-IPO survival," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 31-47.
    2. Jain, Bharat A & Kini, Omesh, 1994. "The Post-Issue Operating Performance of IPO Firms," Journal of Finance, American Finance Association, vol. 49(5), pages 1699-1726, December.
    3. Ritter, Jay R, 1984. "Signaling and the Valuation of Unseasoned New Issues: A Comment," Journal of Finance, American Finance Association, vol. 39(4), pages 1231-1237, September.
    4. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    5. Binay, Murat M. & Gatchev, Vladimir A. & Pirinsky, Christo A., 2007. "The Role of Underwriter-Investor Relationships in the IPO Process," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(3), pages 785-809, September.
    6. Cheung, Yan-leung & OUYANG, Zhiwei & TAN, Weiqiang, 2009. "How regulatory changes affect IPO underpricing in China," China Economic Review, Elsevier, vol. 20(4), pages 692-702, December.
    7. Lamont, Owen & Polk, Christopher & Saa-Requejo, Jesus, 2001. "Financial Constraints and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 529-554.
    8. Rama Seth & S. R. Vishwanatha & Durga Prasad, 2019. "Allocation to Anchor Investors, Underpricing, and the After‐Market Performance of IPOs," Financial Management, Financial Management Association International, vol. 48(1), pages 159-186, March.
    9. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
    10. Rajeswararao Chaganti & Fariborz Damanpour, 1991. "Institutional ownership, capital structure, and firm performance," Strategic Management Journal, Wiley Blackwell, vol. 12(7), pages 479-491, October.
    11. Demiralp, Ilhan & D'Mello, Ranjan & Schlingemann, Frederik P. & Subramaniam, Venkat, 2011. "Are there monitoring benefits to institutional ownership? Evidence from seasoned equity offerings," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1340-1359.
    12. Chemmanur, Thomas J, 1993. "The Pricing of Initial Public Offerings: A Dynamic Model with Information Production," Journal of Finance, American Finance Association, vol. 48(1), pages 285-304, March.
    13. Alberto Abadie, 2005. "Semiparametric Difference-in-Differences Estimators," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(1), pages 1-19.
    14. Field, Laura Casares & Lowry, Michelle, 2009. "Institutional versus Individual Investment in IPOs: The Importance of Firm Fundamentals," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(3), pages 489-516, June.
    15. Joan Farre-Mensa & Alexander Ljungqvist, 2016. "Do Measures of Financial Constraints Measure Financial Constraints?," The Review of Financial Studies, Society for Financial Studies, vol. 29(2), pages 271-308.
    16. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    17. Sherman, Ann E. & Titman, Sheridan, 2002. "Building the IPO order book: underpricing and participation limits with costly information," Journal of Financial Economics, Elsevier, vol. 65(1), pages 3-29, July.
    18. Wei Huang & Agyenim Boateng & Alexander Newman, 2016. "Capital structure of Chinese listed SMEs: an agency theory perspective," Small Business Economics, Springer, vol. 47(2), pages 535-550, August.
    19. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    20. Barry, Christopher B. & Muscarella, Chris J. & Peavy, John III & Vetsuypens, Michael R., 1990. "The role of venture capital in the creation of public companies*1: Evidence from the going-public process," Journal of Financial Economics, Elsevier, vol. 27(2), pages 447-471, October.
    21. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    22. David Williams & W. Duncan & Peter Ginter, 2010. "Testing a model of signals in the IPO offer process," Small Business Economics, Springer, vol. 34(4), pages 445-463, May.
    23. Ritter, Jay R, 1991. "The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
    24. Boehmer, Beatrice & Boehmer, Ekkehart & Fishe, Raymond P. H., 2006. "Do Institutions Receive Favorable Allocations in IPOs with Better Long-Run Returns?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(4), pages 809-828, December.
    25. Mario Levis, 2011. "The Performance of Private Equity‐Backed IPOs," Financial Management, Financial Management Association International, vol. 40(1), pages 253-277, March.
    26. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    27. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    28. Craig Doidge & Alexander Dyck, 2015. "Taxes and Corporate Policies: Evidence from a Quasi Natural Experiment," Journal of Finance, American Finance Association, vol. 70(1), pages 45-89, February.
    29. repec:bla:jfinan:v:44:y:1989:i:2:p:393-420 is not listed on IDEAS
    30. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, vol. 68(1), pages 75-109, April.
    31. Heider, Florian & Ljungqvist, Alexander, 2015. "As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes," Journal of Financial Economics, Elsevier, vol. 118(3), pages 684-712.
    32. Dambra, Michael & Field, Laura Casares & Gustafson, Matthew T., 2015. "The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision," Journal of Financial Economics, Elsevier, vol. 116(1), pages 121-143.
    33. Lee, Peggy M. & Wahal, Sunil, 2004. "Grandstanding, certification and the underpricing of venture capital backed IPOs," Journal of Financial Economics, Elsevier, vol. 73(2), pages 375-407, August.
    34. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    35. Brav, Alon & Gompers, Paul A, 1997. "Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
    36. Reena Aggarwal & Nagpurnanand R. Prabhala & Manju Puri, 2002. "Institutional Allocation in Initial Public Offerings: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(3), pages 1421-1442, June.
    37. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    38. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    39. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    40. Wang, Clement K. & Wang, Kangmao & Lu, Qing, 2003. "Effects of venture capitalists' participation in listed companies," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 2015-2034, October.
    41. Doidge, Craig & Karolyi, G. Andrew & Stulz, René M., 2013. "The U.S. left behind? Financial globalization and the rise of IPOs outside the U.S," Journal of Financial Economics, Elsevier, vol. 110(3), pages 546-573.
    42. S. Ramakrishna Velamuri & Wilson Liu, 2017. "Ownership structure, insider behavior, and IPO performance of SMEs in China," Small Business Economics, Springer, vol. 48(3), pages 771-793, March.
    43. McGuinness, Paul B., 2014. "IPO firm value and its connection with cornerstone and wider signalling effects," Pacific-Basin Finance Journal, Elsevier, vol. 27(C), pages 138-162.
    44. Lu, Yuechan & Samdani, Taufique, 2019. "The economic role of institutional investors in auction IPOs," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 267-281.
    45. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
    46. Mark T. Leary, 2009. "Bank Loan Supply, Lender Choice, and Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 64(3), pages 1143-1185, June.
    47. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    48. repec:bla:jfinan:v:44:y:1989:i:1:p:19-40 is not listed on IDEAS
    49. Brown, Stephen & Dutordoir, Marie & Veld, Chris & Veld-Merkoulova, Yulia, 2019. "What is the role of institutional investors in corporate capital structure decisions? A survey analysis," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 270-286.
    50. Samdani, Taufique, 2019. "Anchor-backed IPOs, reported earnings, and heterogeneous investors' beliefs," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 72-87.
    51. Lemmon, Michael & Roberts, Michael R., 2010. "The Response of Corporate Financing and Investment to Changes in the Supply of Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 555-587, June.
    52. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arnab Bhattacharya & Binay Bhushan Chakrabarti & Chinmoy Ghosh & Milena Petrova, 2020. "Innovations in financing: The impact of anchor investors in Indian IPOs," European Financial Management, European Financial Management Association, vol. 26(4), pages 1059-1106, September.
    2. Paul B. McGuinness, 2019. "The Role of Governance and Bank Funding in the Determination of Cornerstone Allocations in Chinese Equity Offers," JRFM, MDPI, vol. 12(3), pages 1-20, July.
    3. Morais, Flávio & Serrasqueiro, Zélia & Ramalho, Joaquim J.S., 2020. "The zero-leverage phenomenon: A bivariate probit with partial observability approach," Research in International Business and Finance, Elsevier, vol. 53(C).
    4. Dang, Viet Anh, 2013. "An empirical analysis of zero-leverage firms: New evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 189-202.
    5. Natalia Matanova & Tanja Steigner & Bingsheng Yi & Qiancheng Zheng, 2019. "Going concern opinions and IPO pricing accuracy," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 195-238, July.
    6. Borochin, Paul & Yang, Jie, 2017. "Options, equity risks, and the value of capital structure adjustments," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 150-178.
    7. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    8. Jeppsson, Hans, 2018. "Initial public offerings, subscription precommitments and venture capital participation," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 650-668.
    9. Greta Falavigna & Roberto Ippoliti, 2021. "Financial Constraints and the Sustainability of Dividend Payout Policy," Sustainability, MDPI, vol. 13(11), pages 1-15, June.
    10. Zhang, Dongyang & Liu, Deqiang, 2017. "Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?," Economic Systems, Elsevier, vol. 41(2), pages 179-202.
    11. Du, Zhihui & Zheng, Xiaojia & Zhang, Chenye & Zhou, Rongxi, 2023. "Does the online interaction between retail investors and firm management affect capital structure?," Finance Research Letters, Elsevier, vol. 55(PA).
    12. Murillo Campello & Erasmo Giambona, 2011. "Capital Structure and the Redeployability of Tangible Assets," Tinbergen Institute Discussion Papers 11-091/2/DSF24, Tinbergen Institute.
    13. Daniel Broxterman & Tingyu Zhou, 2023. "Information Frictions in Real Estate Markets: Recent Evidence and Issues," The Journal of Real Estate Finance and Economics, Springer, vol. 66(2), pages 203-298, February.
    14. Abdul Rashid & Noshaba Jabeen, 2018. "Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-20, December.
    15. Gustafson, Matthew T. & Iliev, Peter, 2017. "The effects of removing barriers to equity issuance," Journal of Financial Economics, Elsevier, vol. 124(3), pages 580-598.
    16. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    17. Chen, Haosi & Maslar, David A. & Serfling, Matthew, 2020. "Asset redeployability and the choice between bank debt and public debt," Journal of Corporate Finance, Elsevier, vol. 64(C).
    18. Michel, Allen & Oded, Jacob & Shaked, Israel, 2020. "Institutional investors and firm performance: Evidence from IPOs," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    19. Michael Espindola Araki & Henrique Castro Martins, 2022. "Integrating uncertainty and governance into a capital structure puzzle: can risk-taking and rule-taking explain zero-leverage firms?," Review of Managerial Science, Springer, vol. 16(6), pages 1979-2034, August.
    20. Lockhart, G. Brandon, 2014. "Credit lines and leverage adjustments," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 274-288.

    More about this item

    Keywords

    Capital market; Financial market policy; IPO; Firm financing; Capital structure; Capital expenditure;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:91:y:2024:i:c:s1057521923005124. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.