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Authors:

• Ajai SINGH
  Case Western Reserve University

• Arif Khurshed
  University of Manchester

• Alok Pande
  University of Manchester

The distinct regulatory design of Indian IPOs permits an empirical evaluation of IPO underpricing models against those that model IPO initial returns as a consequence of overpricing. Characteristics of the Indian bookbuilding process allow us to study the timing and subscription patterns of different investor groups and to dissect IPO returns into two distinct components: one relating to pre-listing underpricing set by the underwriter and the other to the initial return from first day's trade in the post-listing period. We find that a transparent bookbuilding process can alleviate the winner's curse problem for retail investors but that does not eliminate IPO initial returns. Further, IPO initial returns persist but do not increase even if investment bankers are stripped of their discretionary allocation power. These results are not supportive of the Rock (1986) and Benevineste and Spindt (1989) voluntary underpricing models. We find that the unmet demand of non-institutional investor groups is the primary driver of the IPO initial return and consider these results to be generally supportive of Derrien (2005) and Ljungqvist, Nanda and Singh (2006).