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

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  • Ranganathan, Kavitha
  • Saraogi, Aayush

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.

Suggested Citation

  • Ranganathan, Kavitha & Saraogi, Aayush, 2021. "What explains voluntary premarket underpricing and aftermarket mispricing in Indian IPOs?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:beexfi:v:32:y:2021:i:c:s221463502100109x
    DOI: 10.1016/j.jbef.2021.100565
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    More about this item

    Keywords

    Initial Public Offerings (IPOs); Voluntary underpricing; Sentiment returns; Underwriter reputation; IPO regulation;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • 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

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