International Review of Financial Analysis 91 (2024) 102996

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International Review of Financial Analysis

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The effect of lead institutional investors on investment and capital structure

of young firms: Evidence from Indian IPOs
Aarti Sharma a, *, Ankit Singhal b, Vishwanatha Saragur Ramanna c
a
Masters’ Union School of Business, Gurugram, India
b
IFMR Graduate School of Business, KREA University, Andhra Pradesh, India
c
Mahindra University, Hyderabad, India

A R T I C L E I N F O A B S T R A C T

JEL classification: We study the consequences of an exogenous event, a regulation that allows IPO firms to seek investment from
G10 lead institutional investors in India. We document a significant increase in IPO volume as a result of the regu­
G18 lation. Post-regulation, lead-investor backed firms experience a reduction in issuance cost, an increase in capital
G24
investments and a decrease in leverage. The effects on investments and leverage are significant for high growth
G32
and financially constrained firms. Financially constrained firms backed by lead investors raise 26.4% more equity
Keywords:
than unconstrained firms. Our findings provide evidence that discretionary allocation of shares to lead institu­
Capital market
Financial market policy
tional investors could reduce capital constraints.
IPO
Firm financing
Capital structure
Capital expenditure

1. Introduction institutional investors provides informational benefits to issuing firms

The literature on initial public offerings (IPOs) suggests that insti­
tutional investors in IPOs play several useful roles. There is considerable
evidence on the importance of institutional investors in the pricing of
initial public offerings. Rock (1986) finds that allocation of shares to
institutional investors mitigates the adverse selection problem faced by
retail investors and ensures that retail investors do not withdraw from
the IPO market. Benveniste and Spindt (1989) suggest that institutional
investors help in providing value-relevant information necessary for the
pricing of IPOs. In a similar vein, Aggarwal, Prabhala, and Puri (2002)
provides empirical evidence that institutional allocations help the un­
derwriters in extracting favorable pre-market demand information from
them to adjust the offer price. Consistent with this view, Chemmanur
(1993) finds that these informed investors help in bringing the market
value of a firm’s equity closer to its intrinsic value by their post-IPO
trading activities.
Allotting a large block of shares to institutional investors may be
beneficial for retail investors as it serves as a signal of issue quality and
mitigates information asymmetry ex ante. Thus, allocation to
and retail investors. When the degree of institutional ownership is high,
it provides institutional investors the incentive to monitor a firm’s
performance. Therefore, IPOs backed by institutional investors may
have superior long-term performance. Field and Lowry (2009) show that
institutional ownership may have the ability to predict long-term risk-
adjusted performance. Boehmer, Boehmer, and Fishe (2006) show that
institutional investors obtain more allocations in IPOs with better long-
term performance.
In the last two decades, regulators in emerging markets such as India
and China have introduced a number of reforms to ensure smooth and
effective functioning of the stock market. For example, the China Se­
curities Regulatory Commission has imposed tighter IPO approval pro­
cesses and limits on IPO offer prices (Cheung, Ouyang, & Tan, 2009).
The Securities Exchange Board of India too has initiated a number of
reforms to boost the market access to small and young firms as well as to
curtail the level and volatility of IPO underpricing. We exploit a legal
experiment resulting from the 2009 Securities Exchange Board of India
(SEBI) regulation permitting IPO managers to allocate shares on a
preferential basis to Anchor Investors (AI, who are lead investors in the

* Corresponding author at: Masters’ Union School of Business, G33R+29P, Phase II, Udyog Vihar, Sector 20, Gurugram, Haryana 122008, India.
E-mail addresses: aarti.sharma@mastersunion.org (A. Sharma), ankit.singhal@krea.edu.in (A. Singhal), vishwanatha.r@mahindrauniversity.edu.in
(V.S. Ramanna).

https://doi.org/10.1016/j.irfa.2023.102996
Received 21 April 2023; Received in revised form 10 August 2023; Accepted 9 October 2023
Available online 12 October 2023
1057-5219/© 2023 Elsevier Inc. All rights reserved.
A. Sharma et al.
IPO) in the IPO pre-market, subject to disclosures relating to the price at
which allocations were made and the identity of anchor investors.1 In
this paper we examine the role of these lead institutional investors in
reducing capital constraints that IPO firms face and their impact on
investment and capital structure of these IPO firms. While institutional
ownership may be useful for all types of firms because of their ability to
participate in corporate governance, it may be particularly important for
small and young firms that are about to go public.
The global financial crisis of 2007–2008 had eroded investors’
wealth. The crisis prompted the regulator (SEBI) to initiate the anchor
investor program to instill confidence in investors. We examine whether
the anchor investor initiative resulted in a significant increase in IPO
activity after the crisis. We also exploit the regulatory reform to inves­
tigate whether the investment by anchor investors reduces issuance cost
because of which IPO firms raise more equity. This enhanced ability to
raise capital may allow anchor backed firms to undertake more (prof­
itable) investments as well as to reduce financial leverage.2 We test these
conjectures.
Our analysis uses 788 IPOs that were issued between the first quarter
of 2006 and the second quarter of 2019 out of which 154 were anchor
backed. Our focus is on the impact of anchor investors in the pre- and
after-market. To do this, we employ Difference-in-Difference (DID)
estimation in our analyses. We set up a time window to segregate the
pre- and post-legislation years around the introduction of the regulation
in 2009.
By studying the effect of lead institutional investors on investment
and capital structure of IPO firms we contribute to the literature in the
following ways:
First, Gustafson and Iliev (2017) study the consequences of an
exogenous deregulation in 2008 that allows smaller firms with a public
float of less than $75 m to raise capital through seasoned equity offerings
via the shelf registration process in the U.S. They document a reduction
in equity issuance costs, an increase in investment, and a decline in
financial leverage. In contrast, we use the aforementioned experiment to
study how institutional investors can help IPO firms in achieving the same
result in an emerging market context. Small and young firms that face
asymmetric information may find the association with lead investors
particularly useful to credibly signal their firm quality.
Second, Prior research has examined the impact of Jumpstart Our
Business Startups (JOBS) Act, which was enacted to revitalize the IPO
market for small firms in the U.S.A. Dambra, Field, and Gustafson (2015)
find that, after controlling for market conditions, the JOBS Act led to a
25% increase in IPO volume over pre-JOBS levels and firms with high
proprietary disclosure costs, such as biotechnology and pharmaceutical
firms, increased IPO activity the most. Like them we too study the
consequences of a regulatory reform. We extend the literature by
investigating the role played by lead institutional investors in improving
the market access to young firms. We posit that anchor investors bring
credibility to IPO firms thereby enabling more firms to go public. We
hypothesize that the introduction of anchor investors increases the IPO
volume after controlling for market conditions, and anchor-backed IPOs
raise more equity after controlling for firm characteristics, especially
when they are financially constrained.
1
Anchor investors include prominent international institutional investors
such as Goldman Sachs, Abu Dhabi Investment Authority, Temasek Holdings,
and Société Générale apart from domestic banks, mutual funds and insurance
companies.
2
That institutional shareholding may have a bearing on a firm’s capital
structure is not entirely new. For example, Chaganti and Damanpour (1991)
show that the size of outside institutional stockholding has a significant effect
on the firm’s capital structure. Unlike them we examine the impact of institu­
tional shareholding on IPO firms. In their analysis of firms on the Growth En­
terprise Market (GEM) in China, Huang, Boateng, and Newman (2016) find that
institutional investors’ shareholding does not influence the level of debt.
2
International Review of Financial Analysis 91 (2024) 102996
Third, one of the potential benefits of the anchor investor program is
that it reduces the risk of devolvement for underwriters. The “reduction
in underwriting risk” hypothesis suggests that by pre-selling a large
fraction of shares to anchor investors, underwriters can avoid the risk of
under-subscription.3 Since the process results in a reduction in under­
writing risk, we expect the underwriter compensation to reduce when
anchor investors are involved. This could be particularly true when
reputed anchor investors are involved. We hypothesize that anchor
backing lowers the underwriter compensation, especially when reputed
anchor investors are involved.
Prior research shows that anchor backed IPOs have lower under­
pricing as compared to non-anchor backed IPOs (Lu & Samdani, 2019;
Seth, Vishwanatha, & Prasad, 2019). Our paper differs from these papers
in that we examine the role of lead institutional investors in the reduc­
tion of capital constraints faced by SMEs and the associated impact on
investments and capital structure of IPO firms although we study some
pre-market effects to complete the analysis. Our focus is not on the
impact of anchor investors on IPO underpricing.4 The issuance cost
comprises of underwriter compensation and underpricing. Existing
research shows that the involvement of anchor investors reduces
underpricing. If their involvement also reduces underwriter compensa­
tion, we can infer that issuance costs reduce when lead investors invest
in IPO firms.
Fourth, the signaling theory of Spence (1973) has long been used to
describe IPO activity (e.g., Allen & Faulhaber, 1989; Grinblatt & Hwang,
1989; Ritter, 1984). Anchor investors send credible signal to the market
by making considerable investment in IPO firms. Williams, Duncan, and
Ginter (2010) suggest that pre-market investors convey signals that are
simultaneously related to the IPO’s ability to attract reputable lead
underwriters and multiple underwriters. Additionally, they propose that
there is a correlation between these pre-market signals and the offer
price and total offer amount raised. We posit that the signaling associ­
ated with anchor investor backing would enable IPO firms to raise (and
invest) more capital.5 We expect this to be particularly true of high
growth firms and financially constrained firms.6 Therefore, we hy­
pothesize that anchor backing helps growth firms and financially con­
strained firms to raise more equity when compared with low-growth and
non-constrained firms. If the IPO firms are successful in mobilizing more
equity it would decrease their leverage, ceteris paribus.
Fifth, the literature on the determinants of capital structure has
identified a number of factors such as taxes (Doidge & Dyck, 2015;
Graham, 2000; Heider & Ljungqvist, 2015), market timing (Baker &
Wurgler, 2002), and market conditions (Korajczyk & Levy, 2003).
Dudley and James (2018) analyze capital structure changes around IPOs
by focusing on new-economy firms. Their objective is to examine how
3
They have to sell fewer shares to remaining investors. This reduces their
responsibility and risk.
4
Aggarwal et al. (2002) and Binay, Gatchev, and Pirinsky (2007) jointly
estimate allocation to institutional investors and underpricing using two stages
least squares and seemingly unrelated regressions to address potential endo­
geneity between institutional investment and underpricing. Seth et al. (2019)
point out that, in the U.S context, institutional investors do not face a lock-up
period. They can realize listing day returns by selling shares. Anchor in­
vestors, on the other hand, face a 30-day lock-up because of which initial
returns are of no consequence to them. These investors realize their returns
once the lock-up expires. As a result, they do not expect reverse causality. More
importantly, unlike Seth et al. (2019), the focus of this paper is on investments
and capital structure of investee firms after the IPO, not initial returns. We do
not expect reverse causality between institutional investment and investments
and capital structure of firms.
5
If anchor investors maximize proceeds for their investee firms, in the after-
market these firms should be better positioned to undertake investments that
they otherwise could not have.
6
It is growth firms and financially constrained firms that find anchor backing
more valuable.
A. Sharma et al.
market timing affects leverage ratios.
Several papers have shown that corporate finance decisions can be
influenced through investor preferences (Faulkender & Petersen, 2006;
Leary, 2009; Lemmon & Roberts, 2010). These studies typically use
proxy variables derived from financial statements or market data to
capture capital supply and investor preferences. Brown, Dutordoir, Veld,
and Veld-Merkoulova (2019) survey institutional investors about their
role in capital structure decisions and views on capital structure the­
ories. They find that over 82% of investors believe they influence
corporate capital structure decisions, especially for smaller, younger,
and more financially constrained firms. We empirically show that
institutional investment in IPO firms can be an important determinant of
capital structure of young firms in that they could impact not only the
cost of equity but also the amount of equity raised and leverage.
Sixth, many papers have studied the impact of venture capital and
private equity investors on the initial returns and long-term performance
of IPOs (Brav & Gompers, 1997; Lee & Wahal, 2004; Levis, 2011;
Michala, 2019; Velamuri & Liu, 2017; Wang & Lu, 2003). The moni­
toring role of these institutional investors is also well documented in the
literature (e.g., Barry, Muscarella, Peavy III, & Vetsuypens, 1990). These
investors invest in firms before the IPO. We study investment by insti­
tutional investors at the time of the IPO. Further, other papers do not
study how institutional investors affect the performance of IPO firms.
We contribute to the broader literature on institutional ownership of
young firms by examining the role of institutional investors in reducing
capital constraints faced by IPO firms and their capital structure.
Allotting a large block of shares to institutional investors results in
economics of scale for the issuer and the underwriter and may result in
higher firm value due to monitoring by institutional investors (Shleifer
& Vishny, 1986). While anchor investors may not seek board positions,
because they hold substantial portion of shares they have the incentive
to actively participate in the governance of the corporation. We posit
that anchor investor participation results in a reduction in barriers to
security issuance arising out of asymmetric information because of
which these firms may be able to increase investments and reduce
financial leverage. This is particularly important for growth firms and
financially constrained firms. Therefore, we hypothesize that anchor
backed IPOs undertake more investments after controlling for firm
characteristics and that the increase in investments is particularly more
for anchor-backed, high-growth firms. A related hypothesis is that an­
chor backed firms experience a reduction in financial leverage due to
their ability to maximize offer proceeds and lower the cost of issuing
equity. The reduction in leverage is particularly more for high growth
firms and capital constrained firms.
Several empirical studies have analyzed the impact of institutional
investment on long term performance of IPOs. Field and Lowry (2009)
find that IPO firms with higher institutional investment outperform
firms with lower institutional investment. Investigating the pattern of
institutional and non-institutional investment for a large sample of IPOs
issued in the United States over 20 years, they document that institu­
tional investor accurately use publicly available information to identify
IPO firms that are likely to perform better. Demiralp, D’Mello, Schlin­
gemann, and Subramaniam (2011) find a positive and significant rela­
tionship between post-issue stock returns and the contemporaneous
post-issue changes in total and active institutional ownership and the
concentration of their shareholdings. Their study shows that operating
performance improvements are related to institutional monitoring in the
one, two, and three years following the equity issue. Their results sup­
port the notion that institutional investors have an informational
advantage, which enables them to identify and invest in (subsequently)
better performing firms. Recent papers have studied the impact of
cornerstone investors (similar to anchor investors) in Asian markets
particularly in Hong Kong (Espenlaub, Khurshed, & Saadouni, 2016;
McGuinness, 2014). We investigate the long-term operating perfor­
mance (ROA) of investee firms because our goal is to investigate
whether the higher investments undertaken by anchor backed firms lead
3
International Review of Financial Analysis 91 (2024) 102996
to higher profitability. If monitoring by lead institutional investors is
useful, we would expect investee firms to undertake more profitable
investments. We hypothesize that anchor backed IPOs have higher
operating profitability than non-anchor firms after the IPO.
Our main results are as follows. We document a significant increase
in IPO volume as a result of the regulatory reform. Post-regulation,
anchor-backed firms experience a reduction in issuance cost, an in­
crease 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 in­
vestors raise 26.4% more equity than unconstrained firms. The under­
writer compensation falls by 7% when the IPO is backed by reputed
anchor investors. We find that anchor investor backed firms experience a
significant increase in investments (249.48%). These firms also experi­
ence a reduction of 14.45% in financial leverage (28% for high growth
firms). We do not find these results in placebo specifications. Our find­
ings provide evidence that discretionary allocation of shares to lead
institutional investors could reduce capital constraints.
The rest of the paper is organized as follows. Section 2 describes the
institutional setting, data, and methods. In section 3, we present the
empirical results. We provide additional analyses in Section 4. Section 5
concludes.
2. Institutional setting, data and methods
2.1. Institutional setting
In July 2009, the Securities Exchange Board of India introduced the
concept of Anchor Investors (AIs) in the Indian capital market to boost
investor confidence and provide credible benchmarks for IPO valuation.
The SEBI regulation requires AIs to be Qualified Investor Buyers.7 The
issuing firm can issue up to 30% of the allocation available to QIBs to
anchor investors.8 Anchor investors are required to invest a minimum of
INR 100 million with a lock-in period of one month from the date of
allotment. The goal of this regulatory reform is to attract reputable and
sophisticated investors who could influence investors’ demand by
participating in the pre-IPO market. Further, one-third of the allocation
available to anchor investors must be reserved for domestic mutual
funds. The maximum number of anchor investors permitted in an IPO is
2 for offer size up to INR 100 million, a minimum of 5 and maximum of
25 anchor investors for offer sizes up to and beyond INR 2500 million
respectively, subject to a minimum allotment of INR 50 million per
investor. Typical anchor investors include commercial banks, mutual
funds, foreign institutional investors, venture capital funds, insurance
companies, provident funds and pension funds.
The Indian book building process is similar to those in other coun­
tries such as the U.S.A.9 The lead manager drafts the preliminary pro­
spectus and files the prospectus with the Securities Exchange Board of
India for approval. The preliminary prospectus does not contain the
issue price. On obtaining the authority’s approval, the book runner
7
Qualified institutional investors are institutional investors who are gener­
ally perceived to possess the expertise and the financial strength to evaluate and
invest in securities and are to be registered with the Securities Exchange Board
of India. There are around 300 QIBs in India.
8
The Indian securities law prescribes that (a) not less than 30% of the net
offer be allotted to retail individual investors; (b) not less than 10% of the net
offer be allotted to non-institutional investors i.e. investors other than retail
individual investors and Qualified Institutional Buyers; and (c) not more than
60% of the net offer be allotted to Qualified Institutional Buyers. If QIBs apply
for exactly the same number of shares ear marked for them, the offer would
have a subscription of 1× in the QIB category. Thus, a QIB subscription of 10×
implies an oversubscription of 9× in the QIB category.
9
One important difference between India and the U.S is that underwriters did
not have discretionary allocation power before the initiation of the anchor
investor program.
A. Sharma et al.
circulates the preliminary prospectus with intermediaries such as in­
vestment banks and brokers inviting them to join the syndicate.
After completing the legal process of going public,10 the lead man­
ager begins a road show during which presentations are made to insti­
tutional investors, including potential anchor investors. These meetings
help a firm going public to solicit investments by lead investors. Issuing
firms may be more willing to share information with potential lead in­
vestors in return for assured investment. The underwriters are required
to allocate a predetermined fraction of shares for three categories of
investors i.e., Qualified Institutional Buyers (QIBs), Non-Institutional
Buyers (NIBs) and Retail Individual Buyers (RIBs). The July 2009
regulation carved out a separate category of lead institutional investors
i.e., anchor investors who are allowed to participate in the pre-IPO
market.
The SEBI regulation empowers underwriters to identify anchor in­
vestors and determine an appropriate allotment price. The regulation
stipulates that if the price fixed for public issue through book building is
higher than the price at which anchor investors are allotted, then anchor
investors are required to pay the additional amount. However, if the
price fixed for the public issue is lower than the price at which the
allocation is made to anchor investors, then anchor investors are not
paid the difference in price. The law also prohibits them from selling
their allocations for 30 days from the date of allotment. This early
participation by anchor investors provides a signal of issue quality and
might be beneficial for issuers and investors.
Pricing and allocation must be finalised one day before the book
opens to the general public. The regulation indicates that there should
not be any material relationship between anchor investors and the book
runner or the founders of the firm to ensure that anchor investors are
independent. Once the price at which the allocation is made to the an­
chor investors is fixed, the regulation requires the underwriter to
disclose to the general public the price and the quantum of shares
allotted to anchor investors before the opening of the IPO to other in­
vestors. Since investors know the identity of anchor investors and the
price at which allocations were made, they may use this as a relevant
valuation benchmark.
2.2. Sample and variable construction
Our sample consists of 788 IPOs that were issued between 2006 and
the second quarter of 2019 out of which 154 were backed by anchor
investors. We obtain IPO related information from the Prime IPO
Database and supplement the data with historical stock prices from the
Bombay Stock Exchange (BSE) website. We collect firm-level data from
the Prowess database of the Centre for Monitoring.
Indian Economy, which is a standard source of information related to
financial statements of Indian firms (Khanna & Palepu, 2000).
Appendix A provides a summary of the key variables used in our
analysis and the data sources. We briefly discuss some of the important
variables here.
Underwriter Compensation Total fees charged by the underwriters
IPO Volume 1) Quarterly IPO activity (number of IPOs) scaled by
the number of domestic listed firms in percentage terms [i.e., 100*
(IPOs/Public firms)].
2) Natural logarithm of quarterly IPO proceeds.
Anchor Dummy: Dummy variable equal to 1 if the IPO has anchor
investors, otherwise zero.
Lead Manager Reputation: To measure the quality of the invest­
ment banker/underwriter we use Thomson One Banker rankings and
supplement it with listings in Prime IPO database. The top ten invest­
ment banks (lead managers) in terms of market share are considered
10
This includes filing of prospectus with the concerned stock exchanges and
Registrar of Companies, submission of due diligence certificate and other
documents to the Securities Exchange Board of India.
4
International Review of Financial Analysis 91 (2024) 102996
reputed; others are not. The rankings are updated annually.
Anchor Investor Reputation: Following Seth et al. (2019) we
measure the reputation of an anchor investor by its market share just as
the reputation of an underwriter is measured by its market share.11 We
set the reputation score equal to the market share. By design, the total of
reputation scores of all anchor investors equals 100. These reputation
scores are then translated into an IPO-reputation score by summing up
the scores of each anchor investor backing the IPO. All IPOs with
reputation scores above the median are classified as backed by reputed
anchors.
Financial Constraints: To measure financial constraints, we
construct the Size-Age (SA) index suggested by Hadlock and Pierce
(2010) as − 0.737 Size +0.043 Size2–0.040 Age, where Size is the log of
inflation-adjusted (to 2004) total assets and age is the number of years of
existence since inception. We also cap Size at (the log of) 4.5 billion and
Age at 37 years and then sort firms into terciles based on their index
values. Firms in top tercile are constrained firms while firms in the
bottom tercile are unconstrained firms.
Investment to Assets: Capital expenditure expressed as a percent­
age of the beginning of the period total assets.
Investment to PPE: Capital expenditure expressed as a percentage
of the beginning of the period property, plant and equipment.
Profitability: EBITDA as the percentage of the beginning year of
period total assets.
Tangibility: Ratio of fixed assets and total assets.
Leverage: Book value of long-term debt and short-term debt scaled
by total assets.
Firm Size: Natural log of total assets.
3. Methods
We use OLS regressions to model quarterly IPO volume and under­
writer compensation and propensity score matching and DID estimation
to model investment and financial leverage after the IPO. We employ
Propensity Score Matching (PSM) to match the treated with the un­
treated group. We define anchor-backing as the treatment, anchor-
backed IPOs as the treated group and the non-anchor-backed IPOs as
the untreated. The matching is done using a function of controls such as
market-to-book ratio, tangibility, profitability, firm size, institutional
ownership, and cash flow to assets. Our design is similar to Samdani
(2019). In his paper on Indian IPOs, he points out that the DiD method
provides an unbiased effect estimates under the assumption that trends
over time between the treatment group and the control group remain
unchanged in the absence of a policy intervention that affects the
treatment group but not the control group (Abadie, 2005). He points out
that in the DiD context, it is usually OK for groups to differ in their levels
of outcomes in the pre-2009 period.
Table 1 presents a description of the notation we use for exposition. It
Table 1
Propensity Score Matching (PSM) Notation.
Pre-AI Period Post-AI Period
AI-backed IPO Group 11 Group 12
NAI-backed IPO Group 21 Group 22
This table presents the notation that we follow in our PSM analysis. AI represents
Anchor Investors and NAI represents Non-Anchor Investors, respectively.
11
Market share is simply the ratio of capital committed by an anchor investor
in a year across all IPOs and the total capital committed by all anchor investors
to all IPOs in a year. We posit that issuers would approach only those anchor
investors whose investment sends a positive signal to other investors. Thus, the
market share, as defined above, is a measure of reputation.
A. Sharma et al.
is possible to match the treated and the control group during the pre-
and post-AI period for Group 12, Group 21 and Group 22 but not for
Group11 because we do not have a sample of Al-backed IPOs in the Pre-
AI period. Therefore, we use PSM to identify the sample of NAI-backed
IPOs from the pre-AI period that have similar firm characteristics as the
AI-backed IPOs in the post-AI period. That is, these NAI-backed IPOs
have roughly the same probability of choosing AI had the AI mechanism
existed during the Pre-AI period. We use the nearest neighbor matching
without replacement in our analysis. We identify a sample of 43 firms
from the Pre-AI period (Group11) and match them with AI-backed IPOs
from the Post-Al period (Group12).
Once the matching is done, the entire group of AI-backed IPOs and
the NAI firms from the pre-AI period forms the treated group. The
remaining NAI firms (from the pre-AI period) and from the post-AI
period forms the untreated group. In particular, we have a sample of
197 treated firms and 591 control firms. Then, we employ Difference-in-
Difference (DID) estimation to identify the effect of anchor investment
on anchor-backed IPOs. Specifically, we test whether anchor-backed IPO
firms in general, and growth and financially constrained firms in
particular, were able to reduce leverage and increase investments
following the regulation.
Empirically, we estimate the following DID equation:
Outcomeit = β0 + β1*Postt *Treatedit + β2*Treatedit + βit θ + γj + μt + εit
(1)
Where Postt is an indicator variable to equal to one for fiscal years
ending after 2009. Treated is an indicator variable equal to one if the
IPO is anchor-backed and zero, otherwise. Xit is the set of controls. The
coefficient of interest is β1 of Treatedt*Postt, which is the product of
Treated dummy and Post dummy. We also include year and industry
fixed effects. The error terms are clustered at the firm level to correct for
serial correlation. We have not included Postt as a separate variable in
the regression as the year fixed effects account for any time-varying
changes in the outcome variable. The strength of β1 identifies the dif­
ferential effect of the regulation after controlling for a variety of firm-
level characteristics and overall time trends. Our choice of control var­
iables is broadly in line with Gustafson and Iliev (2017) and include firm
size, firm profitability, growth opportunities, tangibility, sales growth,
firm age, cash flow scaled by total assets and institutional ownership as
appropriate.
3.1. Sample distribution and descriptive statistics
In Panel A of Table 2 we tabulate the sample distribution. As pointed
out in the introduction, the Securities Exchange Board of India intro­
duced the anchor investor program in response to the global financial
crisis. If the initiative was indeed successful, we would expect a jump in
the level of IPO activity. From the table we can see that the number of
IPOs had plunged from 41 in 2008 to 16 in 2009 but grew considerably
the next year.
In Fig. 1 we plot the number of IPOs from the first quarter of 2006 to
the end of second quarter of 2019. The plot shows that the number of
IPOs had dropped by more than 50% between 2007 and the first quarter
of 2009. Soon after the introduction, the number of IPOs increased
fourfold from 16 to more than 60 within a year. The number of IPOs rose
significantly from the second quarter of 2009 to the third quarter of
2010. The graph provides preliminary evidence to support the hypoth­
esis that the regulatory reform resulted in an increase in IPO volume.
Panel B of Table 2 reports the descriptive statistics of our sample of
IPOs. It includes the mean, median and the standard deviation of key
variables used in our analysis. It displays the differences in means be­
tween anchor-backed and non-anchor-backed IPOs. An average anchor
backed firm has total assets of INR 26,236 m, market-to-book ratio of
4.02, Return on Assets of 16%, fixed assets of 19% as a fraction of total
assets, cash flow to assets ratio of 6% and a sales growth rate of 23%. An
5
International Review of Financial Analysis 91 (2024) 102996
average non-anchor firm has total assets of INR 15,155 m, Market-to-
Book ratio of 2.25, Return on Assets of 13%, fixed assets of 18% as a
fraction of total assets, cash flow to assets ratio of − 11% and a sales
growth rate of 31.28%. Anchor backed IPOs have a mean underpricing
of 11.82% whereas non-anchor-backed IPOs have a mean underpricing
of 14.35%.
The difference in firm-level variables such as the market-to-book
ratio, profitability (return on assets, ROA), firm size, institutional
shareholding, cash flow to assets and sales growth rate are statistically
significant. Our univariate analysis suggests that on average, anchor-
backed firms have more growth opportunities than non-anchor-backed
firms. They are more profitable, larger and have a higher percentage
of institutional shareholding. Anchor-backed IPOs have higher cash flow
as compared to non-anchor-backed firms. However, they have lower
growth in sales as compared to non-anchor-backed firms. The difference
in underpricing between anchor backed and non-anchor-IPOs is insig­
nificant. But anchor backed IPOs have significantly higher underwriter
fees. The two sets of firms have similar subscription in retail and insti­
tutional investor categories.
Panel C of Table 2 presents the pairwise correlation among the key
variables used in our analysis. We set the anchor dummy equal to 1 if the
IPO is anchor-backed and zero, otherwise. We find that the anchor
dummy is positively correlated with growth opportunities (M/B ratio),
profitability, institutional shareholding, underwriter fees and cash flow
to assets ratio. We also find that the anchor dummy is negatively
correlated with sales growth rate and insignificantly correlated with
tangibility, investment, and leverage.
4. Results
In this section, we present the main results of the paper. We broadly
segregate our analysis into pre-market and after-market effects. These
are discussed below.
4.1. Pre-market effects
In the sections that follow we undertake multivariate analysis of IPO
volume and underwriter compensation.
4.1.1. IPO volume
At a macro level, the graphical evidence suggests that the anchor
investor program resulted in an increase in IPO activity. We supplement
this evidence with a multivariate regression after controlling for market
and economic conditions. To determine the extent of increase in the IPO
activity after the introduction of anchor investors, we use Ordinary Least
Squares regression in which we control for stock market (index) returns,
market valuations (market-to-book ratio) and economic conditions
measured by the GDP growth rate (Dambra et al., 2015; Doidge, Karolyi,
& Stulz, 2013).
We measure IPO activity in two ways as follows: 1) the number of
IPOs in each quarter as a percentage of public firms and 2) the natural
logarithm of quarterly IPO proceeds. Lagged index return is measured
every quarter using the quarterly closing values of the index. Index M/B
ratio is calculated by dividing the market capitalization of the index by
its book value. GDP growth rate is the quarterly percentage change in
GDP for all the years. Post-regulation dummy, the variable of interest, is
an indicator variable set equal to 1 for fiscal years after 2009. The
regression includes industry and year fixed effects. The results are pre­
sented in Table 3. The coefficient of Post-Regulation dummy in column 1
is positive and statistically significant at the 5% level, which indicates
that the anchor program resulted in an increase in the number of IPOs
after controlling for market conditions.
In column 2 the dependent variable is the natural logarithm of
quarterly IPO proceeds. The coefficient of Post-Regulation is again
positive and significant at the 1% level. The coefficient of 2.877 in­
dicates that IPO firms raised 2.8% more in equity capital after 2009. The
 A. Sharma et al.
Table 2
Sample Characteristics.
Panel A: IPO Sample Distribution

Year No. of IPOs

2006 75
2007 100
2008 41
2009 16
2010 66
2011 39
2012 22
2013 35
2014 44
2015 57
2016 70
2017 88
2018 88
2019 47
Total 788
This table reports the annual distribution of IPOs in our sample from 2006 to 2019 Q2. Our data ends in the second quarter of 2019.

Panel B: Descriptive Statistics

Variables Complete Sample Anchor-backed IPO Non- Anchor-backed Difference

IPO t-statistic
6

Mean Std. Dev. Median

M/B Ratio 2.59 2.23 1.92 4.02 2.25 5.05***

Leverage 0.64 0.10 0.63 0.63 0.64 − 0.31
Tangibility 0.18 0.18 0.12 0.19 0.18 0.60
Profitability 0.14 0.12 0.13 0.16 0.13 4.35***
Firm Size 7.22 2.09 7.02 9.32 6.72 15.9***
Investment 0.03 27.19 0 0.02 0.04 − 0.01
Institutional Shareholding % 8.52 9.99 5.88 16.09 6.90 5.8***
Cash Flow to Assets − 0.08 0.40 − 0.01 0.06 − 0.11 5.6***
GDP Growth Rate 6.96 1.39 7.41 7.28 6.88 3.20***
Index M/B 3.74 1.33 3.13 3.18 3.88 − 5.95***

International Review of Financial Analysis 91 (2024) 102996

Sales Growth Rate 29.60 45.20 19.70 23.12 31.28 − 1.84*
Underpricing (Listing Day) 13.86 36.49 3.80 11.82 14.35 − 0.77
ln (Underwriter Fees) 6.14 2.05 6.21 8.32 5.58 17.54***
ln (QIB Times Subscription) 1.80 1.57 1.62 1.82 1.78 0.24
ln (Retail Times Subscription) 0.98 1.13 0.47 1.07 0.96 1.14
Offer Proceeds 2055.65 6701.27 389.05 5006.92 1471.29 5.36***
Number of Observations 788 788 788 154 634 NA
This table reports the summary statistics of key variables and univariate tests of difference in means between Anchor-backed and non-Anchor-backed IPOs. Our sample consists of a total of 788 IPOs out of which 154 are anchor-backed and 634
are non-anchor-backed IPOs. All the variables are winsorized at the 1% tail. Other variables include Profitability (ratio of EBITDA to total assets), market to book ratio (M/B), Leverage (book value of long-term debt scaled by total assets),
tangibility (ratio of fixed assets to total assets), firm size (ln total assets), Investment (capital expenditure as the percentage of the beginning year of period total assets), Cash flow from operations scaled by total assets, percentage of shares held
by institutional investors and sales growth rate. The significance of the differences in means is based on the student t-test. The asterisk superscripts ***, **, and * represent significance at the 1%, 5%, and 10% levels, respectively.
 A. Sharma et al.
Panel C: Correlation Matrix of Key Variables

Variables Anchor Dummy Firm Investment Under Lev. M/B Tangibility ROA ln UW Fees Institutional ln QIB ln Retail Cash Flow Sales
Size Pricing Ratio Share Holding (%) Sub Sub. To Assets Growth
Rate

Anchor Dummy 1.000

Firm Size 0.493*** 1.000
Investment 0.000 0.003 1.000
Underpricing − 0.028 0.073** − 0.038 1.000
Leverage − 0.022 0.333*** 0.069 − 0.035 1.000
M/B Ratio 0.319*** 0.273*** − 0.134* 0.306*** 0.060 1.000
Tangibility 0.022 0.021 − 0.045 − 0.006 0.105 0.137* 1.000
7

ROA 0.143*** 0.080** − 0.034 0.108*** 0.097 0.191*** 0.152*** 1.000

ln Underwriter (UW) Fees 0.538*** 0.898*** − 0.011 0.089** 0.079 0.410*** 0.035 0.187*** 1.000
Institutional Shareholdings (%) 0.349*** 0.452*** − 0.053 0.153** − 0.022 0.270*** 0.188*** 0.091 0.519*** 1.000
ln QIB Subscription 0.011 0.281*** − 0.099** 0.443*** 0.086 0.424*** − 0.108** 0.120** 0.271*** 0.082 1.000
ln Retail Subscription 0.040 0.231*** − 0.035 0.473*** 0.000 0.180*** 0.009 0.191*** 0.221*** 0.153** 0.717*** 1.000
Cash Flow to Assets 0.178*** 0.223*** − 0.005 0.030 0.032 0.186*** 0.204*** 0.282*** 0.146*** 0.129* 0.152*** 0.096*** 1.000
Sales Growth Rate − 0.073* − 0.020 0.024 0.060 0.044 − 0.042 − 0.017 − 0.081** 0.010 − 0.056 0.103* 0.025 0.010 1.000

This table presents the correlation between the key variables used in our analysis. The variables include an Anchor dummy set equal to 1 if IPO is backed by Anchor investors, Profitability (ratio of EBITDA to total assets),
market to book ratio (M/B), Leverage (book value of long-term debt scaled by total assets), tangibility (ratio of fixed assets to total assets), firm size (ln total assets), Investment (capital expenditure as the percentage of the
beginning year of period total assets), Cash flow from operations scaled by total assets, percentage of shares held by institutional investors, natural log of subscription by institutional and retail investors, and sales growth
rate. All variables are defined in Appendix A. The asterisk superscripts *, **, *** represent significance at 10%, 5%, and 1% levels respectively.

International Review of Financial Analysis 91 (2024) 102996

A. Sharma et al.
Fig. 1. IPO Activity (2006–2019): In the first figure we plot the number of IPOs from the first quarter of 2006 to the beginning of the third quarter of 2019 and in
the second figure we plot the number of IPOs from the first quarter of 2008 to the third quarter of 2010. The solid vertical line corresponds to the time when the
Anchor Investor Regulation was introduced.
coefficients of Index M/B ratio and GDP growth rate are significantly
positive, which suggests that firms raise more capital when the market
valuation is high and economic conditions are good.
4.1.2. Underwriter compensation
Under the Indian securities law, a firm-commitment underwriting
contract is mandatory for the portion of shares offered to the public.
Sherman and Titman (2002) present a model in which underwriter se­
lects a group of investors along with a pricing and allocation mechanism
in a way that maximizes the information generated during the process of
going public at a minimum cost. One of the potential benefits of the
anchor investors program is that it reduces the risk of devolvement for
underwriters. The “reduction in underwriting risk” hypothesis suggests
that by.
8
International Review of Financial Analysis 91 (2024) 102996
pre-selling a large fraction of shares to anchor investors, un­
derwriters can avoid the risk of under-subscription.
Since the process results in a reduction in underwriting risk we
expect the underwriter compensation to reduce when anchor investors
are involved. To test this hypothesis, we run an ordinary least squares
regression with the natural log of underwriter fees as the dependent
variable.12 The control variables include the inverse of the natural log of
offer size, lead manager reputation, venture capital backing, firm age
and firm size that are known to affect underwriter compensation (Eckbo,
Masulis, & Norli, 2007 and papers cited therein). We include (but do not
report) year dummies (as underwriter compensation varies through
time) and industry dummies. We estimate the following model:
12
We use offer proceeds as a control variable as in related papers rather than
scale underwriter compensation by offer proceeds.
A. Sharma et al. International Review of Financial Analysis 91 (2024) 102996

Natural Log of underwriter compensation = β0 + β1 (Anchor Dummy or Reputed Anchor Dummy)

(2)
+ β2 (Control Variables) + Time Fixed Effects + Industry Fixed Effects + ε

issuing equity. This may result in higher investment in projects. To test

Table 4 reports the results of the regressions. In Regression 1, the this hypothesis, we rely on the difference-in-difference framework out­
independent variable of interest is the anchor dummy. The coefficient of lined earlier.
anchor dummy is negative in line with the expectation but insignificant. We estimate the following DID equation:
In Regression 2 we replace anchor dummy with a reputed anchor
Investment/Total Assets = β0 +β1 (Post− regulation Dummy* Treated)
dummy. Since reputed anchors contribute greater amounts of capital
compared to other types of investors, we would expect the underwriter +β2 (Treated) +βj (Control Variables)
fees to fall more steeply when an IPO is backed by reputed anchors. +Time Fixed Effects+ Industry Fixed effects+ ε
The coefficient of reputed anchor dummy is significantly negative (3)
suggesting that underwriter compensation indeed reduces when reputed
The control variables include firm size, firm profitability, sales
anchor investors are involved. The underwriter compensation falls by
growth, cash flow (scaled by total assets) and institutional ownership.
7%. The coefficient of inverse of the natural log of offer proceeds is
We expect bigger, rapidly growing, profitable firms with high cash flows
positive, which suggests that bigger IPOs attract lower fees. This is
to make more investments. We take the extent of institutional ownership
consistent with the view that there are economies of scale in going
as proxy for monitoring.
public. The coefficient of lead manager reputation is positive, which
Table 5 presents the results of our difference-in-difference estima­
supports the notion that reputed underwriters are likely to charge higher
tion. Our primary measures of investment are capital expenditure scaled
fees because of their distribution capabilities. In summary, our analysis
by the beginning period total assets and capital expenditure scaled by
provides evidence to support the fact that anchor investors could reduce
the beginning of the period property, plant and equipment. Column 1
the cost of going public.
reports the result with capital expenditure scaled by the beginning
period of total assets as the dependent variable. The coefficient β1 of
4.2. After-market effects: Investment and financial leverage Treatedt*Post-regulation dummyt is positive and statistically significant
at the 1% level and economically large (41.7%). We also find that
In this sub-section, we investigate whether anchor investors have a
significant impact on investment and financial leverage of IPO firms.
Table 4
4.2.1. Effect on investments Effect of Anchor Backing on Underwriter Compensation.
In the previous sub-section, we showed that the underwriter ln (Underwriter Fees) ln (Underwriter Fees)
compensation reduces when the IPO attracts investment from reputed (1) (2)
anchor investors. In other words, anchor investors reduce the cost of
Anchor Dummy − 0.095
(− 1.407)
Table 3 Reputed Anchor Dummy − 0.851***
IPO Volume. (− 2.659)
Inverse Natural Log Proceeds − 0.165** 0.742**
IPOs/Public Firms ln (Quarterly IPO Proceeds)
(− 2.428) (2.320)
(1) (2)
LM Reputation 0.156** 0.167**
Post-regulation Dummy 0.337** 2.877*** (2.301) 2.510)
(2.433) (2.953) Venture Capital Affiliation 0.096 0.126*
Lag Index Return 0.001 0.02 (1.422) (1.894)
(0.227) (0.782) ln (Firm Age+1) − 0.018 − 0.007
Index M/B 0.047 0.974* (− 0.261) (− 0.103)
(0.887) (1.815) ln (Sales) 0.022 0.019
GDP Growth Rate 0.014 0.352* (0.324) (0.284)
(0.592) (1.856) Intercept 8.590*** 6.996***
Intercept − 0.402 0.987 (10.705) (16.336)
(− 1.503) (0.449) Observations 788 788
Observations 56 56 Adj. R-squared 0.042 0.054
Adj. R-squared 0.849 0.851 Industry Fixed Effects Yes Yes
Industry Fixed Effects Yes Yes Year Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
This table reports the results of OLS regressions. The sample consists of 788 IPOs
This table reports the results of OLS regressions. In column 1 the dependent that were issued between 2006 and 2019 out of which 154 were backed by
variable is the quarterly IPO activity (number of IPOs) scaled by the number of anchor investors. The dependent variables in Regressions 1 and 2 are the natural
domestic listed firms in percentage terms [i.e., 100*(IPOs/Public firms)]. In logs of underwriter fees. The independent variables include an anchor dummy
column 2 the dependent variable is the natural logarithm of quarterly IPO that takes the value of 1 if the IPO is backed by anchor investors, a reputed
proceeds. Post-regulation dummy is an indicator variable set equal to one for anchor dummy that takes the value of 1 if the IPO is backed by reputed anchor
fiscal years after 2009. Lag Index return is the quarterly return on the Bombay investors, inverse of natural log of offer proceeds, a LM reputation dummy,
Stock Exchange Sensitive Index (SENSEX) using quarterly closing values. Index which is 1 if the lead manager is among the top ten in terms of markets share,
M/B ratio is calculated as the market capitalization of the SENSEX (Bombay Venture Capital Affiliation, a dummy that takes on the value of 1 if the issue is
stock exchange sensitive index) scaled by its book value. GDP growth rate is the backed by venture capitalists, the natural log of firm age plus 1, and the natural
quarterly percentage change in GDP during the sample years. All variables are log of sales. The t statistics are in parenthesis. All variables are defined in Ap­
defined in Appendix A. The error terms are clustered at the firm level to correct pendix A. The error terms are clustered at the firm level to correct for serial
for serial correlation. The asterisk superscripts *, ** and *** indicate significance correlation. The asterisk superscripts ***, **, and * denote significance at the
at the 10%, 5%, and 1% levels, respectively. 1%, 5% and 10% respectively.

9
A. Sharma et al. International Review of Financial Analysis 91 (2024) 102996

Table 5 Table 6
Effect of Anchor Backing on Investment. Effect of Anchor Backing on Leverage.
Investment To Assets Investment To PPE Leverage

Treated*Post-regulation dummy 40.994*** 249.485*** Treated*Post-regulation dummy − 0.123**

(2.962) (8.125) (− 2.238)
Anchor Dummy − 41.541*** − 242.315*** Anchor Dummy 0.007
(− 3.188) (− 8.356) (0.153)
ln (Total Assets) 0.712 2.084 ln (Total Assets) 0.034***
(0.594) (0.782) (7.593)
Tangibility 27.190*** − 17.389 Tangibility 0.022
(2.646) (− 0.767) (0.473)
Profitability − 11.568 31.482 M/B Ratio 0.000
(− 0.486) (0.601) (0.005)
Sales Growth Rate 0.066* 0.254*** Profitability 0.118
(1.948) (3.240) (1.184)
Cash Flow/TA − 0.870 − 25.932 Institutional Ownership − 0.000
(− 0.093) (− 1.201) (− 0.458)
Institutional Ownership − 0.330* − 0.484 Intercept 0.473***
(− 1.776) (− 1.188) (4.817)
Intercept 34.991 239.590*** Observations 788
(1.386) (4.318) Adj. R-squared 0.458
Observations 788 788 Industry Fixed Effects Yes
Adj. R-squared 0.290 0.530 Year Fixed Effects Yes
Industry Fixed Effects Yes Yes
Year Fixed Effects Yes Yes This table reports the results of DID regression. The dependent var­
iable leverage is measured as the sum of long term and short-term
This table reports the results of DID regression. In column 1, the dependent debt as a percentage of total assets. Treated is an indicator variable
variable Investment/TA is defined as the ratio of capital expenditure and the equal to 1 if the IPO is backed by anchor investors and zero, other­
beginning-of-the-period total assets (i.e., 100*Capext- t + 1/Total Assetst). In wise. Post-regulation dummy is an indicator variable to equal to 1for
Column 2, the dependent variable Investment/PPE is defined as the ratio of fiscal years after 2009 and zero, otherwise. Treated* Post-regulation
capital expenditure and the beginning-of -the-period property, plant, and dummy is defined as the product of Treated dummy and Post-
equipment (i.e., 100*Capext- t + 1 / PPEt). Treated is an indicator variable equal regulation dummy. All explanatory variables are defined in Appen­
to one if the IPO is backed by an anchor investor and zero, otherwise. Post- dix A. The error terms are clustered at the firm level to correct for
regulation dummy is an indicator variable to equal to one for fiscal years after serial correlation. The asterisk superscripts *, **, and *** indicate
2009. Treated*Post-regulation dummy is defined as the product of Treated significance at the 10%, 5%, and 1% levels, respectively.
dummy and Post-regulation dummy. All variables are defined in Appendix A.
The error terms are clustered at the firm level to correct for serial correlation.
significance, firms experience a reduction of about 14.45% in financial
The asterisk superscripts *, **, and *** indicate significance at the 10%, 5%, and
1% levels, respectively. leverage when the IPO is backed by anchor investors. This supports our
hypothesis that due to reduced issuance costs and resolution of asym­
metric information anchor-backed firms are able to reduce leverage. The
rapidly growing (in terms of sales growth) firms have higher investment.
coefficient of firm size is positive, which suggests that bigger firms have
We replicate our analysis using capital expenditure scaled by the
higher leverage.
beginning period of property, plant, and equipment as the dependent
To ensure that our results are not driven by firms that went public
variable in column 2. The coefficient β1 of Treatedt* Post-regulation
after 2009 and by unrelated reasons, we perform a placebo test by
dummyt is again positive and statistically significant at 1%. It is also
restricting our sample to firms that went public before 2009 and
important to note that the coefficient1 β1 is economically very large
consider 2007 as the event date. If our results are driven by firms that
(249.48%) suggesting a significant increase in investments.
went public around the 2009 regulation and for unrelated reasons, then
we should observe results similar to Tables 5 and 6. Our (unreported)
4.2.2. Effect on financial leverage
results show that there are no significant differences in investment and
Changes in the issuance costs can impact a firm’s capital structure
capital structure choices between the treated and control units. This
(Fischer, Heinkel, & Zechner, 1989). We expect anchor backed firms to
indicates that our results are not mechanically driven by the sudden
experience a reduction in financial leverage due to their ability to in­
change in investment and capital structure choices of firms that went
crease offer proceeds and lower the cost of issuing equity.
public after the 2009 regulation.
To test this hypothesis, we estimate the following DID equation:

Leverage = β0 + β1 (Post − regulation Dummy* Treated) + + β2 (Treated) 5. Additional analyses

+ βj (Control Variables) + Time Fixed Effects
+ Industry Fixed Effects + ε In this section, we provide empirical evidence on the types of firms
that benefit from the regulatory reform. In particular, we investigate
(4)
whether high growth and financially constrained firms benefit more
The control variables include firm size, firm profitability, sales from the involvement of anchor investors.
growth, cash flow (scaled by total assets) and institutional ownership.
We expect bigger firms to borrow more. The literature has shown that
5.1. Impact on growth firms
more profitable firms borrow less (Myers, 1984). Likewise, firms with
more cash flows may borrow less. We take institutional ownership as
In the previous sections we showed that the involvement of anchor
proxy for monitoring.
investors results in a reduction in issuance costs, higher investment, and
In Table 6 we tabulate the results of difference-in-difference esti­
lower financial leverage. We investigate whether this is particularly true
mation. The dependent variable is leverage, which is defined as the sum
of high growth firms because these are the firms that are likely to raise
of long term and short-term debt as a percentage of total assets. The
capital in pursuit of profitable projects and hence, benefit from anchor
coefficient β1 of Treatedt*Post-regulation dummyt in column 1 is
investment. To examine this possibility, we divide our dataset into two
negative and statistically significant at 5% level. In terms of economic
and classify firms as high M/B and low M/B by setting the cut off at the

10
A. Sharma et al. International Review of Financial Analysis 91 (2024) 102996

Table 7 Table 8
Effect of Anchor Backing on Investment by High Growth Firms. Effect of Anchor Backing on Leverage in High Growth Firms.
High M/B Low M/B Leverage

Investment Investment Investment Investment High M/B Low M/B

To Assets To PPE To Assets To PPE
Treated*Post-regulation dummy − 25.662** − 2.286
Treated*Post- 31.447** 222.68*** − 7.632 − 1.461 (− 2.636) (− 0.271)
regulation dummy Anchor Dummy 15.334 − 2.025
(2.226) (5.617) (− 0.237) (− 0.47) (1.673) (− 0.374)
Anchor Dummy − 35.271** − 216.347*** 16.143 1.445 ln (Total Assets) 1.753*** 4.852***
(− 2.604) (− 5.68) (0.497) (0.444) (2.697) (7.82)
ln (Total Assets) 1.814 7.201* − 0.542 − 0.046 ln (Firm Age) − 3.072** − 0.008
(1.285) (1.793) (− 0.221) (− 0.192) (− 2.064) (− 0.005)
ln (Firm Age) 15.107** 89.386*** − 3.282 − 0.581 Tangibility 1.782 8.333
(2.539) (5.343) (− 0.222) (− 0.39) (0.234) (1.261)
Tangibility − 12.627 − 74.5** 64.234*** 2.26 M/B Ratio 0.647 1.697
(− 1.003) (− 2.094) (3.35) (1.228) (1.583) (0.594)
Profitability 64.413* 33.63 − 81.648** − 6.848* Profitability − 3.145 − 0.807
(1.952) (0.363) (− 2.086) (− 1.825) (− 0.177) (− 0.067)
Sales Growth Rate 0.099* 0.415*** 0.037 0.014** Institutional Ownership 0.061 − 0.268
(1.957) (2.91) (0.701) (2.529) (0.614) (− 1.282)
Cash Flow/TA − 23.515 − 85.896** 13.707 0.215 Intercept 69.446*** 32.54***
(− 1.66) (− 2.136) (0.833) (0.123) (6.184) (4.224)
Institutional − 0.252 − 0.454 − 0.244 0.015 Observations 686 102
Ownership Adj. R-squared 0.56 0.746
(− 1.398) (− 0.898) (− 0.318) (0.201) Industry Fixed Effects Yes Yes
Intercept − 7.722 − 18.239 22.3 5.439** Year Fixed Effects Yes Yes
(− 0.351) (− 0.292) (1.07) (2.636)
Observations 686 686 102 102 This table presents the results of DID regressions. Column 1 pertains to firms
Adj. R-squared 0.528 0.698 0.501 0.575 with above-the-median M/B ratio and Column 2 pertains to firms below-the-
Industry Fixed Effects Yes Yes Yes Yes median M/B ratio. The dependent variable leverage is measured as the sum of
Year Fixed Effects Yes Yes Yes Yes the long term plus short-term debt as a percentage of total assets. Treated is an
indicator variable equal to one if IPO is backed by an anchor investor and zero,
This table reports the results of DID regressions. Columns 1 and 2 report result
otherwise. Post-regulation dummy is an indicator variable to equal to one for
for high market-to-book ratio firms while Columns 3 and 4 for low market-to-
fiscal years after 2009 and zero, otherwise. Treated*Post-regulation dummy is
book ratio firms. The classification is based on the cut off at the median. In
defined as the product of Treated dummy and Post-regulation dummy. All
columns 1 and 3, the dependent variable Investment/TA is defined as the ratio of
explanatory variables are defined in Appendix A. The error terms are clustered at
capital expenditure and the beginning-of-the-period total assets (i.e.,
the firm level to correct for serial correlation. The asterisk superscripts *, **, and
100*Capext- t + 1/Total Assetst). In Columns 2 and 4, the dependent variable
*** indicate significance at the 10%, 5%, and 1% levels, respectively.
Investment/PPE is defined as the ratio of capital expenditure and the beginning-
of-the-period property, plant and equipment (i.e., 100*Capext- t + 1 / PPEt).
Treated is an indicator variable equal to 1 if the IPO is backed by anchor in­ 4 present the results for low M/B firms. In columns 1 and 3, the
vestors and zero, otherwise. Post-regulation dummy is an indicator variable to dependent variable Investment/TA is defined as the capital expenditure
equal to one for fiscal years after 2009 and zero, otherwise. Treated*Post- as a percentage of the beginning of the period total assets (i.e.,
regulation dummy is defined as the product of Treated dummy and Post- 100*Capext- t+1/Total Assetst). In Columns 2 and 4, the dependent
regulation dummy. All explanatory variables are defined in Appendix A. The variable is Investment/PPE defined as the ratio of capital expenditure
error terms are clustered at the firm level to correct for serial correlation. The and beginning of the period property, plant and equipment (i.e.,
asterisk superscripts *, **, and *** indicate significance at the 10%, 5%, and 1%
100*Capext- t+1 / PPEt). Treated is an indicator variable equal to one if
levels, respectively.
IPO is backed by an anchor investor and zero, otherwise. Post-regulation
dummy is an indicator variable to equal to one for fiscal years ending
median value of the ratio of market value of equity and the book value of after 2009. Treated* Post-regulation dummy is defined as the product of
equity (Market to Book), a commonly used proxy for growth Treated dummy and Post-regulation dummy.
opportunities. We find that the increase in investment is observed only among firms
We rely on difference-in-difference estimation to test the hypothesis. with a high Market-to-Book ratio. The coefficients (β1) of Treatedt* Post-
We estimate the following equations: regulation dummyt in columns 1 and 2 are positive and statistically
Investment/Total Assets = β0 +β1 (Post − regulation Dummy* Treated) significant at the 5% level and economically large. This supports the
hypothesis that the presence of anchor investors results in higher in­
+β2 (Treated)+βj(Control Variables)
vestment only among High M/B firms. We do not find such evidence
+Time Fixed Effects +Industry Fixed Effects+ ε
among Low M/B firms (columns 3 and 4). Our results are consistent with
(5) the view that firms with more growth opportunities can pursue attrac­
tive growth opportunities that might otherwise have been difficult to
Investment/PPE = β0 + β1 (Post − regulation Dummy* Treated) implement when the IPO is not backed by anchor investors. Next, we
+ β2 (Treated) + βj(Control Variables) (6) replicate the analysis using leverage as the dependent variable as
+ Time Fixed Effects + Industry Fixed Effects + ε follows.
The control variables include firm size, firm profitability, sales Leverage = β0 + β1 (Post − regulation Dummy* Treated) + β2 (Treated)
growth, cash flow scaled by total assets and institutional ownership. + βj (Control Variables) + Time Fixed Effects (7)
Table 7 presents the results of DID estimation. Columns 1 and 2 present + Industry Fixed Effects + ε
the results for firms with high market-to-book ratio while Columns 3 and

11
A. Sharma et al. International Review of Financial Analysis 91 (2024) 102996

Table 9 Table 10
Effect of Anchor Backing on Equity Issuance by Financially Constrained Firms. Effect of Anchor Backing on Leverage in Financially Constrained Firms.
Equity Proceeds Leverage

Constrained Firms Unconstrained Firms Constrained Firms Unconstrained Firms

Treated*Post-regulation dummy 26.401** − 7.127 Treated*Post-regulation dummy − 9.874* − 9.362

(2.069) (− 0.255) (− 1.812) (− 0.852)
Anchor dummy − 8.252 − 7.798 Anchor dummy 1.975 − 10.2
(− 0.824) (− 0.292) (0.436) (− 1.207)
ln (Total assets) − 5.612*** − 1.115 Ln (Total Assets) 3.495*** 4.16***
(− 4.137) (− 0.336) (6.102) (3.666)
ln (Firm Age) 7.71** − 2.472 Ln (Firm Age) 0.061 − 4.784
(2.022) (− 0.247) (0.044) (− 1.316)
M/B ratio − 5.064*** − 3.409** Tangibility 7.378 − 12.076
(− 4.784) (− 2.461) (1.09) (− 1.293)
Profitability − 32.998 − 39.569 M/B ratio − 1.229** 0.763
(− 1.203) (− 0.616) (− 2.606) (1.338)
Tangibility 34.666** − 13.332 Profitability 5.474 52.153*
(2.287) (− 0.569) (0.455) (2.004)
Institutional Ownership − 0.296 0.201 Institutional Ownership 0.043 0.046
(− 1.273) (0.364) (0.412) (0.219)
Intercept 68.287*** 44.989 Intercept 52.444*** 36.391***
(2.984) (1.564) (5.068) (3.321)
Observations 394 394 Observations 394 394
Adj. R-squared 0.621 0.513 Adj. R-squared 0.554 0.596
Industry Fixed Effects Yes Yes Industry Fixed Effects Yes Yes
Year Fixed Effects Yes Yes Year Fixed Effects Yes Yes

This table reports the results of DID estimation. Column 1 reports the results for
constrained firms while Column 2 for unconstrained firms. To measure financial
constraints, we construct Size-Age (SA) index developed by Hadlock and Pierce
(2010) as − 0.737Size + 0.043Size2–0.040Age, where Size is the log of inflation-
adjusted (to 2004) total assets and age is the number of years of existence since
inception. We also cap Size at (the log of) 4.5 billion and Age at 37 years and
then sort firms into terciles based on their index values. Firms in top tercile are
constrained firms while firms in the bottom tercile are unconstrained firms. The
dependent variable is the offer proceeds expressed as the percentage of the
beginning of the year market capitalization. Treated is an indicator variable
equal to 1 if IPO is backed by anchor investors and zero, otherwise. Post-
regulation dummy is an indicator variable to equal to one for fiscal years after
2009 and zero, otherwise. Treated* Post-regulation dummy is defined as the
product of Treated dummy and Post-regulation dummy. All explanatory vari­
ables are defined in the Appendix. The error terms are clustered at the firm level
to correct for serial correlation. The asterisk superscripts *, **, and *** indicate
significance at the 10%, 5%, and 1% levels, respectively.
This table presents the results of DID regression. Column 1 reports the results for
constrained firms while Column 2 for unconstrained firms. To measure financial
constrained firms, we construct Size-Age (SA) index developed by Hadlock and
Pierce (2010) as − 0.737Size + 0.043Size2–0.040Age, where Size is the log of
inflation-adjusted (to 2004) total assets and age is the number of years of exis­
tence since inception. We also cap Size at (the log of) 4.5 billion and Age at 37
years and then sort firms into terciles based on their index values. Firms in the
top tercile are constrained firms while firms in bottom tercile are unconstrained
firms. The dependent variable leverage is measured as the sum of the long term
plus short-term debt as a percentage of total assets. Treated is an indicator
variable equal to one if IPO is backed by an anchor investor and zero, otherwise.
Post-regulation dummy is an indicator variable to equal to one for fiscal years
ending after 2009.Treated* Post-regulation dummy is defined as the product of
Treated dummy and Post-regulation dummy. All explanatory variables are
defined in Appendix A. The asterisk superscripts *, **, and *** indicate signif­
icance at the 10%, 5%, and 1% levels, respectively.

In Table 8, the coefficient β1 of Treatedt* Post-regulation dummyt in

column 1 is negative and statistically significant at the 1% level (− 28%), Table 11
indicating that high growth firms are able to reduce leverage when DID Estimation of Operating Performance.
backed by anchor investors. This result is applicable only for High M/B Post-AI Period Pre-AI Period Overall Difference (1)–
firms while we do not find such evidence for Low M/B firms as shown in (1) (2) (2)

column 2. Before
Matching
AI-backed IPO
5.2. Impact on financially constrained firms 16.9 16.9
(T)
NAI IPO (C) 11.3 15.1 - 3.8 - 3.8
Asymmetric information increases the cost of external finance rela­ Overall 5.6 15.1 13.5
tive to internal cash flows. This creates financing constraints that limit After Matching
the availability of external funds and makes corporate investment sen­ AI-backed IPO
16.9 13.8 3.1
(T)
sitive to cash flow. In a study of Korean firms Kim (1999) shows that the NAI IPO (C) 11.3 15.5 - 4.2 - 4.2
sensitivity of investment to cash flow reduces after the IPO. We posit Overall 5.6 - 1.7 13.5
that the regulatory reform allows financially constrained firms to access Difference (3)–
capital markets. In the absence of anchor investors such firms may have (4) 5.6 - 1.7 7.3***
been rationed out of capital markets. The literature offers a wide variety This table reports the difference in operating performance between anchor-
of proxies to sort firms into financially constrained and unconstrained backed and non- anchor-backed initial public offerings (IPOs) using the
categories. These includes Payout ratio (Almeida, Campello, & Weis­ difference-in-difference (DID) estimation procedure. The regression equation is
bach, 2004), cash flow sensitivities (Fazzari, Hubbard, & Petersen, OP = b0 + b1Date Dummy+b2Anchor Dummy+b3DID, where OP is operating
1988), the Kaplan and Zingales (KZ) index of constraints (Lamont, Polk, performance defined as the earnings before interest, taxes and depreciation
& Saa-Requejo, 2001), the Whited and Wu (WW) index of constraints scaled by the beginning of the year total assets, Date Dummy is a dummy var­
(Whited & Wu, 2006) and the Size-Age (SA) index of constraints (Had­ iable for IPOs launched after 2009, and Anchor Dummy and DID, which is the
product of Date Dummy and Anchor Dummy. The asterisk superscripts *, **, and
lock & Pierce, 2010). Since we have a sample of IPO firms, it is intrin­
*** indicate significance at the 10%, 5%, and 1% levels, respectively.
sically difficult to construct several indices of financial constraints in our
context. IPO firms have short operating and financial history. Data on

12
A. Sharma et al.
dividend payout and cash flow sensitivity are either unavailable or the
approach may not be applicable in our setting. The Hadlock-Pierce index
is the most appropriate.13
To measure financial constraints, we construct the Size-Age (SA)
index suggested by Hadlock and Pierce (2010). The rationale behind
choosing the Size-Age (SA) index is that it requires fewer variables as
compared to the other indexes. Hadlock and Pierce (2010) show that
size and age have meaningful predictive power in determining the level
of financial constraints. Smaller and younger firms exhibit significantly
more uncertainty about their financing ability.
We employ the coefficient estimates from model (Aggarwal et al.,
2002) of Table 6 in Hadlock and Pierce (2010), which utilizes firm size,
irm size squared, and firm age, to produce the SA index to proxy for the
level of financial constraints. We estimate the following regression:
− 0.737 Size +0.043 Size2–0.040 Age, where Size is the log of inflation-
adjusted (to 2004) total assets and age is the number of years of exis­
tence since the inception. To calculate the index values, we follow
Hadlock and Pierce (2010) and redefine size-age capping in our context
and follow Farre-Mensa and Ljungqvist (2016) to sort firms into terciles
based on their index values. Firms in the top tercile are coded as con­
strained and those in the bottom tercile are coded as unconstrained
firms. We estimate the following equation:
Offer Proceeds = β0 + β1 (Post − regulation Dummy* Treated)
+ β2 (Treated) + βj (Control Variables)
+ Time Fixed Effects + Industry Fixed effects + ε
Table 9 presents the results of difference-in-difference estimation.
Column 1 suggests that the regulation has a significant impact on
severely constrained firms. After the regulation, constrained firms
experience an increase of approximately 26% in their offer proceeds,
which is not observed in the case of unconstrained firms.
In Table 10 we provide evidence that the regulation allows con­
strained firms to reduce financial leverage as well.14 We replicate our
analysis using leverage as the dependent variable. The coefficient β1 of
Treatedt* Post-regulation dummyt in column 1 is negative and statisti­
cally significant at the 10% level (− 11.5%). This result holds only for
constrained firms while we do not observe a similar effect among un­
constrained firms (column 2).
5.3. Long-term operating performance
In this section, we examine the impact of anchor investors on long
term operating performance of firms. The literature on IPOs has docu­
mented that issuing firms substantially underperform a sample of
matching firms from the first day of public trading to their three-year
anniversaries (Jain & Kini, 1994; Ritter, 1991). Given the information
content of anchor investment as well as the monitoring role of anchor
investors, we expect anchor-backed firms to have better long-term
operating performance. We estimate the following DID regression
equation:
OP = β0 + β1 Date Dummy + β2 Treated + β3 DID + ε
Where OP is the operating performance, Date Dummy is a dummy
variable for IPOs launched after 2009 and treated is an indicator vari­
able set equal to 1 if the IPO is backed by anchor investors and DID is the
product of Date Dummy and Anchor Dummy.
13
As a robustness check we also construct the KZ index to measure financial constraints. We compute KZ Index as − 1.002 (Cash Flow/K) + 0.283 (Q) + 3.139
(Debt/Capital) – 39.368 (Dividends/K) – 1.315 (Cash/K). Following Lamont et al. (2001), we form portfolios by ranking all firms each year by the KZ Index. We
classify the top 1/3rd of firms as constrained firms and the bottom 1/3rd as unconstrained firms. The results of our regression are available upon request. We have not
presented the results for the sake of brevity.
14
Maximizing offer proceeds results in a reduction in leverage.
International Review of Financial Analysis 91 (2024) 102996
The DID test we perform focusses on the statistical significance of the
following DID:
DID = {[OP12–OP11]–[OP22–OP21] } (10)
In Table 11 we report the results of DID estimation. The dependent
variable, operating performance, is defined as the earnings before in­
terest, taxes, and depreciation (measured one year after the IPO) scaled
by beginning of the year total assets. The variable of interest is DID. The
coefficient on DID is positive and significant at 1% level of significance.
In terms of economic significance, anchor backed firms experience an
improvement of about 7.3% in their post-issue operating performance
after the regulation. This result supports our hypothesis that anchor
investors can create value through significant improvement in post-issue
operating performance of investee firms.
6. Discussion and conclusions
Prior research suggests that allocation of shares to anchor investors
in an initial public offering (IPO) has a significant impact on the valu­
ation and underpricing of IPOs primarily due to the mitigation of ex ante
information asymmetry. We report additional evidence on the moni­
toring role of anchor investors. We document a negative relation be­
tween anchor backing and the cost of going public and financial
leverage, and a positive relation with investments and offer proceeds.
(8) We find that anchor investment could be particularly valuable for high
growth and capital constrained firms. Anchor backed firms exhibit su­
perior operating performance after the IPO. Overall, we conclude that
discretionary allotment of shares to anchor investors has a positive
impact on the performance of firms.
Our research is of interest to regulators and corporate managers as
well. Regulators are concerned with asymmetric information and agency
problems that plague the primary market for IPOs. We show that a well-
designed mechanism could not only alleviate these problems but also
attract new investors to the market. As such, other economies could
draw lessons from the Indian experiment. Likewise, managers of issuing
firms may confront challenges in investor communication. Attracting
lead institutional investors in a transparent bidding system could resolve
these challenges.
Declaration of Competing Interest:
None.
Data availability
The authors do not have permission to share data.
Acknowledgements
We thank the anonymous reviewers, the Editor, Ramakrishna Vela­
muri, Partha Chatterjee, Shalu Kalra, Ankur Mehra, Venkatesh Sundar,
(9)
Ragupathy M. B., Asish Bhattacharyya, the reviewers, discussants and
participants at the Indian Institute of Management Kozhikode 2020
Symposium, Indian Institute of Technology Kharagpur Conference 2021,
World Finance Conference 2021, and seminar participants at Shiv Nadar
University for helpful comments. All errors are ours.
13
A. Sharma et al. International Review of Financial Analysis 91 (2024) 102996

Appendix A. Construction of variables

Variable Variable Definition Data Source

Anchor Dummy Indicator variable equal to one if IPO is backed by an anchor investor and zero, otherwise Prime IPO Database
Anchor Reputation Market share held by anchor investors Prime IPO Database
Cash Flow to Assets Cash flow from operations expressed as a percentage of the beginning of the year total assets CMIE PROWESS Database
Firm Age Number of years of existence since the inception CMIE Prowess Database
Firm Size Natural log of total assets CMIE PROWESS Database
GDP Growth Rate Quarterly percentage change in GDP Reserve Bank of India
Index M/B Ratio Market capitalization of the SENSEX scaled by its book value. CMIE PROWESS Database
Index Return Quarterly returns of Bombay Stock Exchange Sensitive Index (SENSEX) Bombay Stock Exchange
Institutional Percentage of common stock held by institutional investors CMIE PROWESS Database
shareholding
Investment to Assets Capital expenditure expressed as a percentage of the beginning of the year total assets CMIE PROWESS Database
Investment to PPE Capital expenditure expressed as a percentage of the beginning of the year property, plant, and equipment CMIE PROWESS Database
IPO Volume 1. Quarterly IPO activity (number of IPOs) scaled by the number of domestic listed firms in percentage terms [i.e., Prime IPO Database
100*(IPOs/Public firms)].
2. The natural logarithm of quarterly IPO proceeds
Lead Manager Indicator variable equal to 1 if the IPO is lead managed by one of the top 10 lead managers in terms of market share Thomson ONE, Prime IPO
Reputation Database
Leverage Book value of long-term debt and short-term debt scaled by total assets CMIE PROWESS Database
ln (Offer Proceeds) Natural log of IPO proceeds Prime IPO Database
ln (Underwriter (UW) Natural log of fees charged by the underwriter Prime IPO Database
Fees)
M/B Ratio Market value of equity divided by book value of equity CMIE PROWESS Database
Profitability EBITDA as the percentage of the beginning of the year total assets CMIE PROWESS Database
Sales Growth Rate (%) Percentage change in sales over the past year CMIE PROWESS Database
Tangibility Ratio of fixed assets and total assets CMIE PROWESS Database
Venture Capital Indicator variable equal to 1 if IPO is backed by venture capitalist and zero, otherwise CMIE PROWESS Database
Affiliation

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