An Empirical Analysis on Effect of IPO s on Long Run Stock Performance of Selected Listed Companies in the National Stock Exchange of India

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1 An Empirical Analysis on Effect of IPO s on Long Run Stock Performance of Selected Listed Companies in the National Stock Exchange of India K. Bhagya Lakshmi Assistant Professor School of Management Studies, Chaitanya Bharathi Institute of Technology, Hyderabad, Telangana Dr.S.Saraswathi Head, School of Management Studies, Chaitanya Bharathi Institute of Technology, Hyderabad, Telangana Dr.Y.Ramakrishna Director, R.K.Bussiness School, Hyderabad ABSTRACT This study focuses on effect of Initial Public Offering (IPO) on performance of stocks in the long run of listed companies at NSE India. A sample of 12 IPOs and SEO of Indian companies during the period 2009and 2010 are considered for the study. Data was obtained from published annual financial statements. The present paper used secondary data of variables like share price, earnings per share and price earnings ratio of the stock. In order to observe the performance of the stock in the long run, Buy and Hold Abnormal Returns (BHAR) model is used. In order to test whether there is significant under performance of IPOs in the long run of Indian companies, hypothesis testing was done using the t-test at 95% confidence level. It was analyzed that earnings per share, price earnings ratio, overall stock performance and buy and hold abnormal returns were decreased. Results showed that the stock under performs in the long run after IPO issue at NSE India but not significantly. KEYWORDS: Share price, Price earnings ratio, Stock performance, Buy and Hold Abnormal Returns. 1. INTRODUCTION An Initial Public Offering (IPO) is a company s first offering of equity to the public. IPO is a main resource of capital for firms. All the companies raise capital through sale of securities through IPOs for the first time (Ritter, 1991; Loughran and Ritter 1995). In the studies of (Burrowes, Feldmann, & Feldmann, 2004) examined under performance and liquidity risk of initial public offerings and the degree of under pricing discovered. The study by Shah (1995) provides facts on the short run performance of 2056 new listings of companies over the period January 1991 to May 1995 and documents a phenomenal 105.6% excess return over the offer price. Jain and Kini (1994) were the first to investigate the operating performance of US IPOs in the first three years after going public. Many of the studies conducted by Ritter (1991) were based in Asia, Europe and the US. These often demonstrated a positive link between initial public offer and the performance of the company. IPO in US Market studied by Reilly and Hatfield (1969) for the period concluded that there was under-pricing to the extent of 11%. Liu & Li (2000), identified by taking a sample of 781 IPO S in the years 1991, 1992 & 1993, that the first day initial return was very high in comparison to other years. MASRP (return) for 1 st, 5 th, 10 th and 20 th trading days of Shenzhen stock exchange and average MASRP (return) was 139.4% which was also higher than Shanghai stock exchange. Studies of (Ritter, 1998; Durukan, 2002; Bessler and Thies, 2007; Goergen et al, 2007; Kirkulak, 2008) were analysed that performance of initial 854 K. Bhagya Lakshmi, Dr.S.Saraswathi, Dr.Y.Ramakrishna

2 public offerings (IPOs) have shown under performance in the long run. Lee et al (1996) Taylor, S.Walter, T (1996) investigated IPOs in Australian markets from also found underperformed in three years. (Chia & Padgett, 2005) Surveyed Short-run under pricing and its characteristics in Chinese IPO markets. Research of (Agatheea, Sannasseea, & Brooks, 2012) shows that ex ante financial strength (based on the Altman Z-score) has a significant negative effect on short-run under pricing. Arwah Arjun Madan (2003), investigated IPOs in the Indian Capital Market and found that in the long run there is a drastic fall in the return on IPOs and found to be negative from the second to the fifth year of listing. In another study, Madhusoodanan and Thiripalraju (1997) concluded that IPOs offered on BSE during the period 1992 to 1995 showed under pricing. 2. OBJECTIVES OF THE STUDY The objectives of the study are: 1. To study the long term performance of a company s stock after it goes public. 2. To analyze the factors influencing the long term performance of IPOs. 3. HYPOTHESIS Hypothesis: 1 H 0 : There is no significant effect of IPO on share price of companies in the long run post-ipo. Hypothesis: 2 H 0 : There is no significant effect of IPO on earnings per share of companies in the long run post-ipo. Hypothesis: 3 H 0 : There is no significant effect of IPO on price earnings ratio of in the long run post-ipo. Hypothesis: 4 H 0 : There is no significant underperformance of stocks in the long run post-ipo. 4. RESEARCH MEHODOLOGY The current study is basically empirical study to observe the long term performance of Initial Public Offerings (IPOs) in the selected sample of Indian IPOs. A random sample of IPO which are listed at NSE for a period 2009 and 2010 was chosen for the study. A sample of 12 companies has chosen to analyze the stock performance based on the mean share price, Earning per Share and P/E ratio over a period of five years. In order to study long performance of IPO S the buy and hold abnormal returns have been used to investigate whether the stocks underperformed in the long run. In order to calculate Buy and Hold Abnormal Returns, the return of the stock is subtracted from the return of the IPO. BHAR=Π (1+Ri, t) Π (1+Rbenchmark, t) Where N is the number of stocks and R is the benchmark return at time t. Stock returns were calculated as: Dividend per share/ Stock nominal price. Hypothesis testing was done to check whether the effect of IPO in the long run was significant. T- Test two sample means with unequal variances for each category at a 95% level of significance was used for present study. 855 K. Bhagya Lakshmi, Dr.S.Saraswathi, Dr.Y.Ramakrishna

3 5. RESULTS AND DISCUSSIONS Table 5.1: Overall Stock Performance of 12 IPO S after public issue for five years Particulars share price EPS p/e ratio Overall stock performance BHAR Table 5.1 shows overall stock performance of the companies after IPO issue by using share price, earnings per share and price earnings ratio for 5 years were analyzed in this study. Figure 5.1: Trends in Overall Stock Performance Figure 5.1 shows the overall stock performance of the 12 companies based on the mean share price, mean EPS and the mean P/E ratio over a period of five years. From the figure, the overall stock performance of companies declines after the companies are listed. The 3rd year shows some stability but there is a sharp decline after that. It is marked that the performance is declining and poor in the long run. This shows that the long run performance of stocks is generally poor. 856 K. Bhagya Lakshmi, Dr.S.Saraswathi, Dr.Y.Ramakrishna

4 Figure 5.2: Trend of Buy and Hold Abnormal Returns - Figure 5.2 shows the trend of the mean buy and hold abnormal returns of the 12 companies after IPO from the first year after listing in the NSE up to the fifth year. The buy and hold abnormal returns decline in the first years and rises till the fourth year then declines in the fifth year. It was found that there is a decline in buy and hold abnormal returns in fifth year after IPO. Table 5.2: t-test Two-Sample Assuming Unequal Variances Mean share price Mean BHAR Mean Variance Hypothesized Mean Difference 0 Df 4 t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table 5.2 indicates that the share price and t statistic computed was and the p value was lf t Stat < -t Critical two-tail or t Stat > t Critical two-tail, we can see that t Stat value i.e is greater than t Critical two tail value i.e It is in critical region. We reject the null hypothesis and accept the alternative hypothesis that there is a significant effect of IPO on share price of stocks in the long run. 857 K. Bhagya Lakshmi, Dr.S.Saraswathi, Dr.Y.Ramakrishna

5 Table 5.3: t-test Two-Sample Assuming Unequal Variances Mean EPS Mean BHAR Mean Variance Hypothesized Mean Difference 0 df 7 t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table 5.3 shows earnings per share and t statistic computed was and the p value was We reject the null hypothesis. In the analysis we can see that t Stat value i.e is in acceptance region, so accept the null hypothesis that says that there is no significant effect of IPO on earnings per share of companies quoted at National stock Exchange in the long run. Table 5.4: t-test: Two-Sample Assuming Unequal variances Mean Mean P/E Ratio BHAR Mean Variance Hypothesized Mean Difference 0 df 4 t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table 5.4 indicates Price earnings ratio where t statistic was and p value was and we reject the null hypothesis. In the analysis we can see that t Stat value i.e is in acceptance region, So accept the null hypothesis that says that there is no significant effect of IPO on Price earnings ratio of companies quoted at National stock Exchange in the long run. 858 K. Bhagya Lakshmi, Dr.S.Saraswathi, Dr.Y.Ramakrishna

6 Table 5.5: t-test Two-Sample Assuming Unequal Variances Mean overall performance Mean BHAR Mean Variance Hypothesized Mean Difference 0 df 4 t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table 5.5 shows stock performance where t statistic was 8.033and the p value was and fell in the reject region. Thus reject the null hypothesis which says that there is no significant relationship between underperformance of stocks and long run post-ipo at national stock exchange. Thus we accept the alternative hypothesis that implies there is a significant relationship between underperformance of stocks and long run post-ipo at national stock exchange. 6. CONCLUSIONS The study has revealed that the overall stock performance in the long run after going public under perform in terms of trend analysis but not significantly. The study has identified that the stock performance of companies is poor in the long run based on the buy and hold abnormal returns. The buy and hold abnormal returns decline in the first years and rise till the fourth year then declines in the fifth year. These findings support Ritter (1991), who argues that long-run underperformance is positively related with initial abnormal returns; however, the evidence is neither consistent nor strong. The more investors participate in the IPO, the larger initial returns might be expected and this result excess demand for IPO takes place. But eventually after certain period there may be underperformance in the long run. According to statistical analysis the share prices and overall performance shows the significant effect on the long term performance of IPO s.though earnings per share and price to earnings ratio are decreased through the years, it does not affect the long term performance. From the study it is analyzed that there is a significant relationship between underperformance of stocks and long run post-ipo at national stock exchange. REFERENCES 1. Agatheea, U., Sannasseea, R., & Brooks, C. (2012). The underpricing of IPOs on the Stock Exchange of Mauritius. Research in International Business and Finance, Arwah Arjun,Madan ( 2003), Investments in IPOs in the Indian Capital Market,Bimaquest- Vol.-III, Issue-I, January, Bessler, W. and Thies,S. (2007). The long-run performance of initial public offerings in German, Managerial Finance, Vol. 33 Iss: 6 pp K. Bhagya Lakshmi, Dr.S.Saraswathi, Dr.Y.Ramakrishna

7 4. Burrowes, A., Feldmann, H., & Feldmann, M. (2004). An Examination of Underperformance and Liquidity of Initial Public Offerings by High Growth Stocks on the German Neuer Markt. Managerial Finance, 30, Chia, J., & Padgett, C. (2005). Short-run underpricing and its characteristics in Chinese initial public offering (IPO) markets. Research in International Business and Finance, Durukan,M.B. (2002).The relationship between IPO returns and factors influencing IPO performance: case of Istanbul Stock Exchange, Managerial Finance, Vol. 28 Iss: 2 pp Goergen, M., & Renneboog, L. (2007). Does ownership matter? A study of German and UK IPOs. Managerial Finance, 33, Jain, B. & Kini, O. (1994). The Post Issue operating performance of IPO firms, Journal of Finance. Vol.5. pp Kirkulak,B. (2008). The initial and long-run returns of Japanese venture capital-backed and non-venture capitalbacked IPOs, International Journal of Managerial Finance, Vol. 4 Iss: 2 pp Loughran, T. and Ritter, J.R. (1995) The New Issues Puzzle, Journal of Finance,Vol. 50, pp Lee, Taylor, S.Walter, Australian IPO pricing in the short and long run. Journal of Banking and Finance 20, Liu, L., and Li W. D. (2000), Research on First Day s Abnormal Returns of IPOs in China s Securities Market, China Accounting and Finance Review, Vol. 2, No. 4, Madhossodanan, T.,P., and Thiripalraju M. (1997), Underpricing in Initial Public Offerings: the Indian Evidence, Vikalpa, Vol.22, No Ritter, J. (1991). The long run performance of Initial Public Offerings Journal of Financial Economics Vol. 46. pp Reilley, F. K. and Hatfield, K. (1969). Investor Experience with New Stock Issues. Financial Analysts Journal,September-October, 25, pp Ritter, J. (1998). Initial Public Offering: Journal of Financial Economics Vol. 15.pp Shah, A. (1995). The Indian IPO Market: Empirical Facts,Technical Report. Mumbai: Centre For Monitoring Indian Economy. 860 K. Bhagya Lakshmi, Dr.S.Saraswathi, Dr.Y.Ramakrishna