Lit review –

Puri H (2012) in his research entitled “An Empirical Investigation of Short-Run Performance
of IPOs in India” analyzeded the short run market adjusted performance of 100 IPOs listed
on National Stock Exchange (NSE) from the period April 2008 to March 2011(3 years). This
study found that Indian IPO market provides positive abnormal return to investors on short-
run basis (1st and 7th day). The researchers found that the IPO returns start decreasing at
the end of 30th day and the IPO shows negative return. It was found that market adjusted
average return of the IPO for the first, seventh and thirtieth trading day is 7.23%, 2.09%, and
-8.58%. T
Madan (2003) - “Investments in IPOs in the Indian capital market” examined the relationship
between return on listing and issue price, issue size, age of firm, issue capital listing and was
found negative. The study found that the relationship between the variables was statistically
significant. The researcher also found that the issue rating was positive for relationship
between returns on listing of the IPO shares and foreign equity. The study concluded that in
the long run, there was a significant fall in IPO returns.
Alok Pande and R. Vaidyanathan (2007) - “Determinants of IPO Underpricing in the National
Stock Exchange of India” , looks at the pricing of IPOs in the NSE. In terms of the demand
that the IPO has generated among the investors, the delay in listing of the shares on the
stock exchange, and the money that the company spends on marketing the initial public
offering, the researchers try to understand empirically the 1st day underpricing of initial
public offerings. The study's key findings was that the demand which the initial public
offering had generated and the listing delay of the IPO had a significant positive impact on
the first day of pricing. The money spent on the promotion of the IPO had no major effect on
pricing on the first day. The study also found that the performance of the IPO post 1 month
of listing is negative.

Puri H (2012) in his research entitled “An Empirical Investigation of Short-Run Performance
of IPOs in India” analyzeded the short run market adjusted performance of 100 IPOs listed
on National Stock Exchange (NSE) from the period April 2008 to March 2011(3 years). This
study found that Indian IPO market provides positive abnormal return to investors on short-
run basis (1st and 7th day). The researchers found that the IPO returns start decreasing at
the end of 30th day and the IPO shows negative return. It was found that market adjusted
average return of the IPO for the first, seventh and thirtieth trading day is 7.23%, 2.09%, and
-8.58%. T

The underpricing in India's initial public offerings (IPOs) has garnered significant
attention within academic research. Researchers such as Lode and Deo (2015) and Dahiya
and Kaur (2018) have conducted studies examining the correlation between underpricing
and subsequent long-term performance. The findings of much research on this matter are
inconclusive, as some indicate that IPOs priced below their actual value tend to have
more robust performance after being listed. In contrast, others argue that initial
underpricing does not necessarily result in persistent positive returns.

Historical trend
Singh and Sehgal (2008) - “Determinants of Initial and Long-Run Performance of IPOs in
Indian Stock Market” investigated the possible determinants of underpricing and the long
run performance of 438 Indian initial public offerings (IPOs) listed on the Bombay Stock
Exchange during June 1992-- March 2001. The researchers found that underpricing in Indian
IPO’s has been found to be 99.20%. The level of under-pricing is extremely high compared
with the international evidence. The study also found that some of the important
determinants of under-pricing are Age of the firm, listing delay of the IPO and the demand
for the IPO. It was also found that in the long run, the Indian initial public offerings don’t
tend to underperform.

Long-run returns are expected to be low when the IR is high, going by divergence of opinions
theory. Many researchers (Mudambi et al., 2012; Omran, 2005; Ritter, 1991; Sehgal & Singh,
2008) have reported a negative relation between IERs and long-run returns. However, some
other studies (Alvarez & Gonzalez, 2005; Belghitar & Dixon, 2012; Lee et al., 1996) find a
positive relation between IER and long-run performance. Underpricing, according to these
studies, reflects the quality of the issuing firms and their ability to issue shares at market
prices in subsequent offerings. Many studies (Balatbat, Taylor & Walter, 2004; Belghitar &
Dixon, 2012; Ritter, 1991) find a positive relation between issuer age and long-run
performance of IPOs. Older firms’ IPOs are expected to have less information asymmetry
with investors and are, therefore, expected to perform better in the long run. However, Brau,
Couch and Sutton (2012) and Liu, Uchida and Gao (2012) report an insignificant negative
relationship between issuer age and long-run performance of IPOs. Many research studies in
India have examined the impact of IPO grading on the IPO underpricing. Deb and Marisetty
(2010) study 115 ungraded and 48 graded IPOs (total 163 IPOs) made by Indian companies
between April 2006 and March 2009. They find that underpricing has reduced in the post-
grading regime compared to pregrading regime. The high-grade IPOs are less underpriced
compared to the low-grade ones. Likewise, Jacob and Agarwalla (2012) find that grading
does influence the demand for an issue though the influence is very limited. The study,
however, fails to find any evidence of improvement in pricing efficiency due to IPO grading.
Similarly, Banerjee and Rangamani (2014) study the underpricing of 163 Indian IPOs made
between 2007 and 2012. The study confirms the prevalence of underpricing in Indian IPOs.
There was no evidence of significant difference in underpricing between IPOs graded by
different CRAs. The extent of oversubscription does affect the IRs. In general, the IPOs that
are highly oversubscribed are expected to have higher IR due to the fad effect. The investors,
who fail to get the allotment in the IPOs, buy the shares on listing resulting in the creation of
a speculative bubble resulting in a better short-run performance and a poor longrun
performance.

The relationship between Initial Public Offering (IPO) characteristics and their long-term
performance has been extensively explored in the literature, with several factors being
identified as influential. Divergence of opinions theory suggests that long-run returns are
expected to be low when the Initial Earnings Report (IER) is high. Mudambi et al. (2012),
Omran (2005), Ritter (1991), and Sehgal & Singh (2008) have reported a negative
relationship between IERs and long-run returns. Conversely, Alvarez & Gonzalez (2005),
Belghitar & Dixon (2012), and Lee et al. (1996) find a positive relation between IER and long-
run performance. Underpricing of IPOs is often seen as reflecting the quality of issuing firms
and their ability to issue shares at market prices in subsequent offerings. Balatbat, Taylor &
Walter (2004), Belghitar & Dixon (2012), and Ritter (1991) find a positive relation between
issuer age and long-run performance of IPOs. However, Brau, Couch and Sutton (2012) and
Liu, Uchida and Gao (2012) report an insignificant negative relationship between issuer age
and long-run performance. The impact of IPO grading on underpricing has been examined in
the context of the Indian market. Deb and Marisetty (2010) found that underpricing reduced
in the post-grading regime compared to the pre-grading regime. Similarly, Jacob and
Agarwalla (2012) observed limited influence of grading on demand for an issue, with no
evidence of improvement in pricing efficiency. Banerjee and Rangamani (2014) confirmed
the prevalence of underpricing in Indian IPOs, but found no significant difference in
underpricing between IPOs graded by different Credit Rating Agencies (CRAs). Furthermore,
the extent of oversubscription has been shown to affect IPOs' Initial Returns (IRs). Highly
oversubscribed IPOs are expected to have higher IRs due to the fad effect. Investors who fail
to get allotment in oversubscribed IPOs may buy shares on listing, leading to a speculative
bubble and better short-run performance but poor long-run performance.

The type of industry is related with the level of underpricing. If a company considers to do an
IPO and the company is in a field that already has comparable publicly traded companies, the
valuation of the IPO will be linked to the valuation multiples of the competitors. Investors
will be willing to pay a similar amount for comparable publicly traded companies. Corwin
and Harris (2001) find that IPOs are more likely to list on the exchange where their industry
peers are listed. Allen and Faulhaber (1989) showed that underpricing takes place at certain
times in particular industries. The levels of initial returns vary from industry to industry. The
changing risk composition hypothesis, introduced by Ritter (1984), assumes that riskier IPOs
will be underpriced by more than less-risky IPOs. The initial returns of risky firms will be
higher than less risky firms. Riskier firms often set a lower offer price to attract investors to
participate in the IPO. That’s why the underpricing and initial returns will be higher. Lowry
et
al. (2010) found that the variability of IPO initial return is considerably higher when the
fraction of difficult-to-value companies that go public is higher. With difficult-to-value
companies, they refer to young, small, and technology companies.
In the study of Islam et al. (2010), the highest level of underpricing was in the manufacturing
sector. The second highest level of underpricing was registered in the food and allied
products
sector and the lowest level of underpricing was in the paper and printing sector. Many
researchers used the type of industry as a proxy to explain the level of underpricing (Islam,
2010; Wang, 2012; Abu Baker and Uzaki, 2013).
Evidence has shown that market sentiment is directly related with IPO pricing. Underwriters
take advantage of market sentiment by setting an offer price above its intrinsic value. Market
sentiment is the overall attitude of investors toward a particular security or larger financial
market. Rising prices might indicate a bullish market sentiment, while falling prices indicate
a
bearish market sentiment. There are several ways to measure market sentiment. A widely
used
measure of market sentiment is the performance of stock market index prior to the offering.
This is not the only information that matters in measuring market sentiment. The degree of
optimism or pessimism of investors is also important to take into account in IPO pricing. This
can be measured by the Index of Consumer Sentiment (ICS) or the Consumer Confidence
Index (CCI). Baker and Wurgler (2007) showed that it is quite possible to measure market
sentiment. According to them, investor sentiment is a belief about future cash flows and
investment risks that is not justified by the facts at hand. They constructed a sentiment index
based on six proxies for market sentiment. They used the following proxies: trading volume,
dividend premium, closed-end fund discount, number of IPOs, first-day return on IPOs and
equity share in new issues. A few variables should be used to capture market sentiment.
Therefore, this proxy is excluded in this study. Jiang and Li (2013) found that underwriters
only partially adjust offer prices to reflect pre-market sentiment and money left on the table is
positively related to the deterioration of market sentiment in the aftermarket period.

make a structured literature review with this information: The type of industry is related with the
level of underpricing. If a company considers to do an IPO and the company is in a field that
already has comparable publicly traded companies, the valuation of the IPO will be linked to the
valuation multiples of the competitors. Investors will be willing to pay a similar amount for
comparable publicly traded companies. Corwin and Harris (2001) find that IPOs are more likely to
list on the exchange where their industry peers are listed. Allen and Faulhaber (1989) showed that
underpricing takes place at certain times in particular industries. The levels of initial returns vary
from industry to industry. The changing risk composition hypothesis, introduced by Ritter (1984),
assumes that riskier IPOs will be underpriced by more than less-risky IPOs. The initial returns of
risky firms will be higher than less risky firms. Riskier firms often set a lower offer price to attract
investors to participate in the IPO. That’s why the underpricing and initial returns will be higher.
Lowry et al. (2010) found that the variability of IPO initial return is considerably higher when the
fraction of difficult-to-value companies that go public is higher. With difficult-to-value
companies, they refer to young, small, and technology companies. In the study of Islam et al.
(2010), the highest level of underpricing was in the manufacturing sector. The second highest
level of underpricing was registered in the food and allied products sector and the lowest level of
underpricing was in the paper and printing sector. Many researchers used the type of industry as
a proxy to explain the level of underpricing (Islam, 2010; Wang, 2012; Abu Baker and Uzaki, 2013).
Evidence has shown that market sentiment is directly related with IPO pricing. Underwriters take
advantage of market sentiment by setting an offer price above its intrinsic value. Market
sentiment is the overall attitude of investors toward a particular security or larger financial
market. Rising prices might indicate a bullish market sentiment, while falling prices indicate a
bearish market sentiment. There are several ways to measure market sentiment. A widely used
measure of market sentiment is the performance of stock market index prior to the offering. This
is not the only information that matters in measuring market sentiment. The degree of optimism
or pessimism of investors is also important to take into account in IPO pricing. This can be
measured by the Index of Consumer Sentiment (ICS) or the Consumer Confidence Index (CCI).
Baker and Wurgler (2007) showed that it is quite possible to measure market sentiment.
According to them, investor sentiment is a belief about future cash flows and investment risks
that is not justified by the facts at hand. They constructed a sentiment index based on six proxies
for market sentiment. They used the following proxies: trading volume, dividend premium,
closed-end fund discount, number of IPOs, first-day return on IPOs and equity share in new
issues. A few variables should be used to capture market sentiment. Therefore, this proxy is
excluded in this study. Jiang and Li (2013) found that underwriters only partially adjust offer
prices to reflect pre-market sentiment and money left on the table is positively related to the
deterioration of market sentiment in the aftermarket period. remember to incorporate the
appropriate intext citation. and make sure that the lit review follows a proper flow for the
respective themes incorporated. know that i don't just want a summary - i want a literature
review with a proper flow. so make it one cohesive document instead of breaking it down in
different sections and dont bifurcate it in many paragraphs. make it a one big paragraph with a
nice flow
The relationship between the type of industry and the level of underpricing in initial public
offerings (IPOs) has been extensively studied in the literature.

Corwin and Harris (2001) found that IPOs are more likely to list on exchanges where their
industry peers are listed, indicating a strong industry effect on IPO valuation and listing
decisions. Allen and Faulhaber (1989) demonstrated that underpricing tends to occur more
frequently in certain industries and at certain times, suggesting industry-specific factors play
a significant role in determining IPO underpricing levels. Additionally, Ritter (1984) proposed
the changing risk composition hypothesis, suggesting that riskier IPOs are underpriced more
than less risky ones, with riskier firms often setting lower offer prices to attract investor
participation. Lowry et al. (2010) further corroborated this by finding that IPO initial return
variability is higher when the fraction of difficult-to-value companies, such as young, small,
and technology firms, is higher. Islam et al. (2010) found that the manufacturing sector
exhibited the highest level of underpricing, followed by the food and allied products sector,
while the paper and printing sector had the lowest level of underpricing, indicating
variations in underpricing levels across industries. Market sentiment also plays a crucial role
in IPO pricing, with underwriters taking advantage of investor sentiment by setting offer
prices above intrinsic value. Baker and Wurgler (2007) constructed a sentiment index based
on various proxies, including trading volume, dividend premium, closed-end fund discount,
number of IPOs, and first-day returns on IPOs, to measure market sentiment, highlighting
the importance of investor optimism or pessimism in IPO pricing decisions. Jiang and Li
(2013) found that underwriters only partially adjust offer prices to reflect pre-market
sentiment, leading to money left on the table being positively related to deteriorating
market sentiment in the aftermarket period. Therefore, industry-specific factors and market
sentiment both contribute significantly to IPO pricing and underpricing levels, shaping the
dynamics of IPO markets.

Lit Review:
Previous studies of ipo performance -
Initial Public Offerings (IPOs) have been an area of extensive research globally, with
a particular focus on understanding their short-term performance, determinants of under-
pricing, and their long-term implications. An empirical research investigating the short-run
performance of IPOs in India concluded that Indian IPOs provided positive abnormal returns
to investors on a short-run basis. However, this positive performance diminished over time,
with returns turning negative after the 30th day. This indicates that while IPOs may generate
initial excitement and positive returns, this may not be sustained in the long term (Puri et. al,
2012). Similarly, another study conducted by Alok Pande and R. Vaidyanathan (2007)
revealed that the performance of IPOs post one month of listing was negative, suggesting that
under-pricing on the first day may not necessarily translate into long-term positive returns for
investors. This study focused on the determinants of IPO under-pricing in the National Stock
Exchange, and examined factors such as demand among investors, listing delay, and
marketing expenditures, and concluded that demand and listing delay had a significant
positive impact on first-day pricing, while marketing expenditures had no major effect.
Further research by Lode and Deo (2015) and Dahiya and Kaur (2018) explored the
relationship between under-pricing and subsequent long-term performance of IPOs in India.
The findings of these studies are inconclusive, with some indicating that IPOs priced below
their actual value tend to have more robust performance after being listed, while others argue
that initial under-pricing does not necessarily result in persistent positive returns.
 The relationship between IPO characteristics and their long-term performance has
been extensively explored in existing literature. Factors influencing IPO pricing may have
implications for their long-term performance, with certain characteristics leading to a
significant fall in returns over time. Madan et. al (2003) found a negative relationship
between return on listing and factors such as issue price, issue size, age of the firm, and issue
capital listing. Additionally, the study observed that the issue rating had a positive
relationship with returns on listing of IPO shares and foreign equity. A negative relationship
is present when long-run returns are expected to be low when the initial earning is high,
which is concluded by many researchers such as Mudambi et al. (2012), Omran (2005), Ritter
(1991), and Sehgal & Singh (2008). Conversely, Alvarez & Gonzalez (2005), Belghitar &
Dixon (2012), and Lee et al. (1996) find a positive relation between IER and long-run
performance. Underpricing of IPOs is often seen as reflecting the quality of issuing firms and
their ability to issue shares at market prices in subsequent offerings. Balatbat, Taylor &
Walter (2004), Belghitar & Dixon (2012), and Ritter (1991) find a positive relation between
issuer age and long-run performance of IPOs. However, Brau, Couch and Sutton (2012) and
Liu, Uchida and Gao (2012) report an insignificant negative relationship between issuer age
and long-run performance. The impact of IPO grading on underpricing has been examined in
the context of the Indian market. Deb and Marisetty (2010) found that underpricing reduced
in the post-grading regime compared to the pre-grading regime. Similarly, Jacob and
Agarwalla (2012) observed limited influence of grading on demand for an issue, with no
evidence of improvement in pricing efficiency. Banerjee and Rangamani (2014) confirmed
the prevalence of underpricing in Indian IPOs, but found no significant difference in
underpricing between IPOs graded by different Credit Rating Agencies. Furthermore, the
extent of oversubscription has been shown to affect IPOs' initial returns. Highly
oversubscribed IPOs are expected to have higher initial returns due to the “fad effect.”
Investors who fail to get allotment in oversubscribed IPOs may buy shares on listing, leading
to a speculative bubble and better short-run performance but poor long-run performance.

Historical trends in ipo performance

Methodologies of evaluating ipo performance

https://www.researchgate.net/profile/Sanjay-Dhamija/publication/
317222933_Determinants_of_Long-
run_Performance_of_Initial_Public_Offerings_Evidence_from_India/links/
5b915f6ca6fdccfd541edd5d/Determinants-of-Long-run-Performance-of-Initial-Public-
Offerings-Evidence-from-India.pdf

Empirical evidence of long-run IPO performance performed in various other

developing countries show similar outcomes; however, developed nations tend to behave
differently, as long-term IPO performance shows a positive trajectory due to market
efficiency present in these countries (Dhamija et. al, 2017).