IDEAS home Printed from https://ideas.repec.org/a/sae/vision/v21y2017i4p375-384.html
   My bibliography  Save this article

Valuation and Pricing of Indian IPOs

Author

Listed:
  • C.P. Gupta
  • Sneha Suri

Abstract

It is believed that underpriced initial public offerings (IPOs) are undervalued. To empirically test this belief, the present study examines valuation of 292 Indian IPOs listed from 2004 to 2013. In this regard, three questions are posed: first, whether the valuation (P/E multiples) of the industry and comparable peer can explain valuation (‘offer price P/E’ multiple) of IPO firms; second, whether the IPOs are undervalued or overvalued in relation to industry peers; and third, whether the IPOs undervalued (overvalued) in relation to peers are underpriced (overpriced). The results suggest that industry and comparable peer valuations do explain IPO valuation. It was found that there are both undervalued and overvalued IPOs in India. However, IPOs can be underpriced regardless of whether they are undervalued or overvalued in relation to industry/peers. Therefore, retail investors should not consider all underpriced IPOs as undervalued and cheap. IPOs may be priced above industry and yet generate positive initial returns (be underpriced). The IPOs valued below the comparable peers can generate higher initial returns. Thus, the present study contributes in providing relation between pricing and valuation of IPOs in India using industry/peer benchmark provided in prospectus so that retail investors can take appropriate decision about subscribing for an IPO.

Suggested Citation

  • C.P. Gupta & Sneha Suri, 2017. "Valuation and Pricing of Indian IPOs," Vision, , vol. 21(4), pages 375-384, December.
    • Handle: RePEc:sae:vision:v:21:y:2017:i:4:p:375-384
    DOI: 10.1177/0972262917734706
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0972262917734706
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0972262917734706?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
    ---><---

    References listed on IDEAS

    as
    1. Peter Roosenboom, 2007. "How Do Underwriters Value Initial Public Offerings? An Empirical Analysis of the French IPO Market," Contemporary Accounting Research, John Wiley & Sons, vol. 24(4), pages 1217-1243, December.
    2. 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.
    3. 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.
    4. Alexander Ljungqvist & Vikram Nanda & Rajdeep Singh, 2006. "Hot Markets, Investor Sentiment, and IPO Pricing," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1667-1702, July.
    5. Amir, Eli & Lev, Baruch, 1996. "Value-relevance of nonfinancial information: The wireless communications industry," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 3-30, October.
    6. François Derrien, 2005. "IPO Pricing in 'Hot' Market Conditions: Who Leaves Money on the Table?," Post-Print hal-00480827, HAL.
    7. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1995. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, vol. 3(1), pages 139-140, May.
    8. Franҫois Derrien, 2005. "IPO Pricing in “Hot” Market Conditions: Who Leaves Money on the Table?," Journal of Finance, American Finance Association, vol. 60(1), pages 487-521, February.
    9. Eli Bartov & Partha Mohanram & Chandrakanth Seethamraju, 2002. "Valuation of Internet Stocks—An IPO Perspective," Journal of Accounting Research, Wiley Blackwell, vol. 40(2), pages 321-346, May.
    10. Rajesh Aggarwal & Sanjai Bhagat & Srinivasan Rangan, 2009. "The Impact of Fundamentals on IPO Valuation," Financial Management, Financial Management Association International, vol. 38(2), pages 253-284, June.
    11. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
    12. Francesca Cornelli & David Goldreich, 2003. "Bookbuilding: How Informative Is the Order Book?," Journal of Finance, American Finance Association, vol. 58(4), pages 1415-1443, August.
    13. Thomas J. Chemmanur & Karthik Krishnan, 2012. "Heterogeneous Beliefs, IPO Valuation, and the Economic Role of the Underwriter in IPOs," Financial Management, Financial Management Association International, vol. 41(4), pages 769-811, December.
    14. Francis, J & Olsson, P & Oswald, DR, 2000. "Comparing the accuracy and explainability of dividend, free cash flow, and abnormal earnings equity value estimates," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 45-70.
    15. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
    16. Francesca Cornelli & David Goldreich, 2001. "Bookbuilding and Strategic Allocation," Journal of Finance, American Finance Association, vol. 56(6), pages 2337-2369, December.
    17. 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.
    18. repec:bla:jfinan:v:53:y:1998:i:6:p:1839-1885 is not listed on IDEAS
    19. Hou, Kewei & van Dijk, Mathijs A. & Zhang, Yinglei, 2012. "The implied cost of capital: A new approach," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 504-526.
    20. Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September.
    21. Welch, Ivo, 1992. "Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
    22. Jing Liu & Doron Nissim & Jacob Thomas, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, March.
    23. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    24. 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.
    25. Michael Firth & Yue Li & Steven Shuye Wang, 2008. "Valuing IPOs Using Price-Earnings Multiples Disclosed by IPO Firms in an Emerging Capital Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 11(03), pages 429-463.
    26. Jacob K. Thomas, 2007. "Discussion of “How Do Underwriters Value Initial Public Offerings? An Empirical Analysis of the French IPO Market†," Contemporary Accounting Research, John Wiley & Sons, vol. 24(4), pages 1245-1254, December.
    27. Amiyatosh K. Purnanandam, 2004. "Are IPOs Really Underpriced?," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 811-848.
    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. Oehler, Andreas & Rummer, Marco & Smith, Peter N., 2004. "IPO Pricing and the Relative Importance of Investor Sentiment: Evidence from Germany," Discussion Papers 26, University of Bamberg, Chair of Finance.
    2. 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.
    3. Yong, Othman, 2007. "A review of IPO research in Asia: What's next?," Pacific-Basin Finance Journal, Elsevier, vol. 15(3), pages 253-275, June.
    4. Chi, Yeguang & He, Jingbin & Ma, Xinru & Wu, Fei, 2023. "Air pollution and institutional investors' valuation bias during initial public offerings," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    5. Agoraki, Maria-Eleni K. & Gounopoulos, Dimitrios & Kouretas, Georgios P., 2022. "U.S. banks’ IPOs and political money contributions," Journal of Financial Stability, Elsevier, vol. 63(C).
    6. Pons-Sanz, Vicente, 2005. "Who benefits from IPO underpricing? Evidence form hybrid bookbuilding offerings," Working Paper Series 428, European Central Bank.
    7. Agathee, Ushad Subadar & Sannassee, Raja Vinesh & Brooks, Chris, 2012. "The underpricing of IPOs on the Stock Exchange of Mauritius," Research in International Business and Finance, Elsevier, vol. 26(2), pages 281-303.
    8. Grammenos, Costas Th. & Papapostolou, Nikos C., 2012. "US shipping initial public offerings: Do prospectus and market information matter?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(1), pages 276-295.
    9. Santos, Francisco, 2017. "IPO market timing with uncertain aftermarket retail demand," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 247-266.
    10. Roosenboom, Peter, 2012. "Valuing and pricing IPOs," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1653-1664.
    11. Dorsman, André & Gounopoulos, Dimitrios, 2013. "European Sovereign Debt Crisis and the performance of Dutch IPOs," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 308-319.
    12. Josef Schuster, 2003. "The Cross-Section of European IPO Returns," FMG Discussion Papers dp460, Financial Markets Group.
    13. Schuster, Josef Anton, 2003. "The cross-section of European IPO returns," LSE Research Online Documents on Economics 24859, London School of Economics and Political Science, LSE Library.
    14. Cook, Douglas O. & Kieschnick, Robert & Van Ness, Robert A., 2006. "On the marketing of IPOs," Journal of Financial Economics, Elsevier, vol. 82(1), pages 35-61, October.
    15. Gounopoulos, Dimitrios & Kallias, Antonios & Kallias, Konstantinos & Tzeremes, Panayiotis G., 2017. "Political money contributions of U.S. IPOs," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 19-38.
    16. 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.
    17. Clarke, Jonathan & Khurshed, Arif & Pande, Alok & Singh, Ajai K., 2016. "Sentiment traders & IPO initial returns: The Indian evidence," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 24-37.
    18. Klova, Valeriia, 2017. "IPO underpricing: What about the shipping sector?," Journal of Multinational Financial Management, Elsevier, vol. 42, pages 95-115.
    19. Feng, Xunan & Johansson, Anders C. & Wei, Dengxi, 2023. "Judging a book by its cover: Analysts and attention-driven price patterns in China's IPO market," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    20. Banerjee, Shantanu & Güçbilmez, Ufuk & Pawlina, Grzegorz, 2016. "Leaders and followers in hot IPO markets," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 309-334.

    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:sae:vision:v:21:y:2017:i:4:p:375-384. 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: SAGE Publications (email available below). General contact details of provider: .

    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.