Investor protection and institutional investors’ incentive for information production

Accepted Manuscript Title: Investor Protection and Institutional Investors’ Incentive for Information Production Authors: Sagi Akron, Taufique Samdani PII: DOI: Reference:

S1572-3089(17)30181-X http://dx.doi.org/doi:10.1016/j.jfs.2017.03.001 JFS 529

To appear in:

Journal of Financial Stability

Received date: Revised date: Accepted date:

29-5-2016 16-2-2017 9-3-2017

Please cite this article as: Akron, Sagi, Samdani, Taufique, Investor Protection and Institutional Investors’ Incentive for Information Production.Journal of Financial Stability http://dx.doi.org/10.1016/j.jfs.2017.03.001 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

Highlights We examine regulatory policies' impact on institutional investors incentive. Institutional investors understate the IPO price under investor protection policy. We show the impact of underwriting contract risks on IPO underpricing. We show an information production—investor protection policy tradeoff.

Investor Protection and Institutional Investors’ Incentive for Information Production Sagi Akron * ♦

and Taufique Samdani ♦♦

(Accepted for publication at the Journal of Financial Stability)

Abstract

We exploit a quasi-experimental setting in India to empirically demonstrate that non-discretionary allocation of book-building initial public offering (IPO) shares incentivizes institutional investors to understate the value of IPO shares in the primary market, so they can acquire shares at a lower price in the secondary market. Our IPO underpricing framework, which disentangles the effect of institutional investors‘ incentive —associated with allocation policy, from the effect of underwriters‘ risk —associated with underwriting contract, demonstrates that underpricing in book-building IPOs underwritten with firm-commitment contracts in India is higher in the post-September 2005 nondiscretionary allocation investor protection period, than in the pre-September 2005 discretionary allocation period. Conversely, underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower in the post-September 2005 investor protection period than in the pre-September 2005 period. Overall, our findings, which are robust to endogneity concerns, reveal a policy tradeoff between information production and investor protection.

Keywords:

IPO underpricing; book-building versus fixed-price IPO; firm-commitment versus best-efforts contracting; non-discretionary allocation; institutional investors and investor protection

JEL classification: G1, G2, G3 * Corresponding author. ♦ Sagi Akron, Department of Business Administration, Faculty of Management, University of Haifa, Mt. Carmel, Haifa, 3498838, Israel, Phone: +972-4-8288495, Fax: +972-4-8249194. Email: [email protected]; [email protected]. ♦♦ Taufique Samdani, External Professor, EDHEC Business School, 24 avenue Gustave Delory, 59057 Roubaix Cedex 1 - France, Phone:+33-6-21497311 Fax: +33-6-21497311, Email: [email protected]. The authors wish to thank the managing editor of Journal of Financial Stability, Professor Iftekhar Hasan, and two anonymous referees for their excellent comments and kind guidance. The authors wish to thank also Dan Bradley, Gunther Capelle-Blancard, Jean-Bernard Chatelain, Gilles Chemla, Jay Dahya, Eti Einhorn, Robert Savickas, Jaap Spronk, Amir Ziv, the participants at EBES 2015 conference in Venice, IESEG 2015 Research Seminar in Paris,

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and ICEF/LFE 2016 Research Seminar in Moscow, for providing valuable information and feedback, PRIME database, and Wharton Research Data Services (WRDS). Part of the research was conducted while Sagi Akron was a Visiting Officer of Research at Columbia Business School, Columbia University, and a Visiting Scholar at the College of Business, University of South Florida. Akron dedicates the paper to the memory of his mentor at the University of Haifa, Professor Steven Plaut.

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1.

Introduction An important task of the underwriters of initial public offerings (IPOs) is to determine the

share price the market is willing to bear at the time of the IPO. The underwriters of book-building IPOs accomplish this by soliciting well-informed institutional investors for market demand information. In return for information reporting, institutional investors receive favorable allocation of IPO shares (e.g., Sherman and Titman, 2002; Cornelli and Goldreich, 2001; Benveniste and Spindt, 1989; Benveniste and Wilhelm, 1990). The underwriters of fixed-price IPOs, in contrast, mostly cater to less-informed retail investors and are constrained by the fixed-price IPO mechanism design from incentivizing investors (e.g., Busaba and Chang, 2010; Ritter, 1998; Benveniste and Busaba, 1997).1 Consequently, less information is produced by fixed-price IPOs than by book-building IPOs. Given that institutional investors play an important information production role in book-building IPOs, it is crucial for the underwriters of book-building IPOs to solicit well-informed institutional investors for information. While there is much discourse about the role of institutional investors in developed markets, very little is known about their counterparts in emerging markets. Knowledge about institutional investors‘ information production role and information reporting quality is important for both the firms going public by way of IPOs, and the capital market policymakers examining the tradeoffs in policies, such as in allocation policies, which affect institutional investors‘ information reporting incentive. Should allocation policies promote information production by favoring institutional investors, at the expense of investor protection (i.e., at the expense of allocation ―fairness‖), or should the policies promote ―non-discriminatory‖ allocation of IPO shares, at the expense of

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The offer price in fixed-price IPOs, unlike in book-building IPOs, is set without first soliciting investor demand (e.g., Busaba and Chang, 2010; Ritter, 1998; Benveniste and Busaba, 1997).

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information production? Are the benefits of institutional investors‘ incentive for information production in an equity market of interest higher/lower than the benefits of investor protection? Stated differently, are institutional investors in the equity market of interest well-informed, and is the institutional setting conducive to information production? To provide insight into these questions, we examine in this paper a set of information production-related and risk-related IPO market characteristics that affect IPO price discovery and thereby IPO underpricing, or the abnormal first-day return. We propose an IPO underpricing framework in which we disentangle the effects of the various facets of information production and risk to IPO participants on IPO underpricing. Our study aims to provide a mechanism for determining whether institutional investors in an equity market of interest are well-informed, and whether their participation in book-building IPOs contributes to information production. To this end, we examine whether, and how, allocation policies and underwriting contracts in an emerging market (India) affect underwriters‘ risk in IPOs and institutional investors‘ information reporting incentive in book-building IPOs relative to fixed-price IPOs. Given that underwriting contracts and allocation of IPO shares to investors in the primary market are critical for a well-functioning capital market, the findings in our study have relevance for capital market policymakers in countries across the world. Consistent with the asymmetric information frameworks of Benveniste and Spindt (1989), Benveniste and Wilhelm (1990), and Sherman and Titman (2002), we argue that ―certainty‖ in favorable allocation of book-building IPO shares—attributed to discretionary allocation policies— incentivizes well-informed institutional investors to report important market-demand information to underwriters, which reduces information asymmetry and thereby IPO underpricing. Conversely, and consistent with the asymmetric information framework of Busaba and Chang (2010), we argue that ―uncertainty‖ in favorable allocations of book-building IPO shares—attributed to non-discretionary allocation policies—incentivizes institutional investors to understate the value of IPO shares in the 4

primary market, so they can acquire shares at a low price in the secondary market, which increases IPO underpricing. 2 By bidding low in the primary market, institutional investors increase their chances of acquiring non-discretionarily allocated book-building IPO shares at a low price in the secondary market. This strategy is especially rewarding if the number of bids for non-discretionarily allocated book-building IPO shares in the primary market is higher than the number of available IPO shares. The IPO market in India, which includes both fixed-price IPOs and book-building IPOs, provides an ideal test-environment for studying the effects of institutional investors‘ incentives on information production, and thereby on information asymmetry and IPO underpricing. The January 1, 2004 to August 30, 2007 time-window—which is large enough to include sufficient observations and small enough to exclude the effects of other regulatory changes, such as the mandatory grading policy introduced on May, 1 2007, and the effects of documented irregularities in book-building IPOs in the years subsequent to its introduction to the Indian equity market in 1999 (Bubna and Prabhala, 2011) —is particularly attractive for the study, as it includes the exogenous September 2005 investor protection regulatory act. 3 Therefore, we examine in this paper the impact of the September 2005 regulatory act on institutional investors‘ incentive for information reporting and on underwriters‘ risk in underwriting contracts in book-building IPOs and in fixed-price IPOs within the January 1, 2004 to August 30, 2007 time-window in India. In addition to choosing between the two issue methods, firms in India must also choose between two types of underwriting contracts, namely, firm-commitment and best-efforts. In firmcommitment contracts, the underwriter commits to raising the agreed-upon funds. In best-efforts 2

In the asymmetric information framework of Busaba and Chang (2010), soliciting a large number of institutional investors in the book-building procedure increases competition among investors and creates uncertainty in favorable allocations. Consequently, institutional investors are likely to report a lower IPO price in the primary market and profit from buying shares at the lower price in the secondary market. 3 The mandatory IPO grading policy in India was not enforced until after August 30, 2007.

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contracts, the underwriter pledges his best efforts to raise funds. Given that the underwriter assumes the risk of unsold IPO shares in the case of firm-commitment contracts, but not in best-efforts contracts, we expect, ceteris paribus, underpricing in IPOs underwritten with firm-commitment contracts to be higher than underpricing in IPOs underwritten with best-efforts contracts. Our results, using a unique dataset of 157 book-building IPOs and 54 fixed-price IPOs in India between January 1, 2004 and August 30, 2007, reveal that underpricing in book-building IPOs underwritten with firm-commitment contracts is higher under the post-September 2005 nondiscriminatory allocation investor protection policy than under the pre-September 2005 discretionary allocation policy. Conversely, underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower in the post-September 2005 investor protection policy period than in the preSeptember 2005 period. Thus, the results, which are robust to endogeneity, demonstrate that institutional investors in the Indian IPO market are well-informed. In addition, their participation in book-building IPOs positively contributes to information production under the pre-September 2005 discretionary allocation policy, and negatively contributes to information production under the postSeptember 2005 non-discretionary allocation investor protection policy. Our study contributes to the IPO literature examining the effect of the perceived risk to underwriters in firm-commitment underwriting contracts on IPO underpricing, which is difficult to test using the U.S. type book-building IPOs that are almost always underwritten with firmcommitment contracts (Dunbar, 1998). Our findings demonstrate that underpricing in book-building IPOs underwritten with firm-commitment contracts in India is higher under a non-discretionary allocation policy than under a discretionary allocation policy. In contract, underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower under an investor protection policy than in the pre investor protection period. The findings support the hypothesis that, ceteris paribus, underpricing is higher in IPOs underwritten with firm-commitment contracts than in IPOs 6

underwritten with best-efforts contracts because of the former‘s higher underwriters‘ risk (Ritter, 1987; Booth and Smith,1986). The findings also empirically support the hypothesis that nondiscretionary allocation policies adversely affect institutional investors‘ bidding behavior in the primary market (Busaba and Chang, 2010; Bradley et al., 2009), thereby rendering the book-building IPO procedure costlier to the issuer. Thus, the findings have implications for policymakers concerned with the effects of allocation policies on well-functioning equity markets around the world.

2. 2.1.

Institutional setting and IPO underpricing in India Institutional setting and the September 2005 regulatory act A firm considering an IPO in India can either choose the book-building issue method or the

fixed-price issue method. The book-building issue method was introduced to the Indian equity market in late 1999, whereas the fixed-price method was introduced in 1992, coinciding with the economic liberalization reforms—toward a more market-oriented economy and a less governmentregulated economy, which were initiated in 1991. The economic reforms in India also led to the creation of a new regulatory body—the Securities and Exchange Commission of India (SEBI), in 1992. As regards the book-building IPO method, the issuing firm chooses a Book Running Lead Manager (BRLM), who is a specialized intermediary, to conduct due-diligence on the issuing firm‘s finances and operations, in order to ensure that the issuing firm is in compliance with the SEBI rules specified in the Disclosure and Investor Protection (DIP) Guidelines document. The BRLM, in consultation with the syndicate of investment banks participating in the IPO, prepares a draft prospectus, which includes the initial IPO price range, and files the draft prospectus with the SEBI. The book-building IPO offer price is determined after the bidding phase. The fixed-price IPO offer 7

price, in contrast, is determined prior to the bidding phase. The bidding phase in book-building IPOs in India, unlike in book-building IPOs in the U.S., is transparent in that investors in India can observe the status of the book on the stock exchanges at half-hour intervals. Investors in India can revise their bids during the bidding period, but not after the bidding period, and not after the offer price has been set by the BRLM. While the offer price in the U.S. book-building IPOs can deviate (up to 20%) from the initial price range, the offer price in India has to be set, per the SEBI rules, within the initial IPO price range. Many European countries, including France, Germany, and the U.K. experimented with a variety of hybrid book-building–fixed-price–auction issue methods in the early 1990s. By the late 1990s, the book-building IPO method had all but replaced the fixed-price method, the auction method, and the hybrid methods in Europe (Jagannathan et al., 2015). Almost all varieties of hybrid IPOs in Europe consisted of an institutional tranche and a retail tranche (Derrien and Womack, 2003). Biddings for shares in the two tranches were either sequential or simultaneous. In the sequential hybrid IPOs, bids for shares the institutional tranche preceded bids for shares the retail tranche, whereas bids for shares in both tranches were simultaneous in the simultaneous hybrid IPOs. As a result, IPO offer prices in the sequential hybrid IPOs in Europe were set much earlier than in the simultaneous hybrid IPOs. Derrien and Womack (2003) examine the impact of the two types of hybrid IPOs on IPO underpricing in France and demonstrate that the offer prices in the sequential hybrid IPOs include a discount for the time gap between the offer price setting date and the trading date. The book-building IPOs in India are similar to the hybrid IPOs in Europe in that both types of IPOs include an institutional tranche and a retail tranche. Bidding for shares in the two tranches in the Indian IPO is simultaneous. Unlike the U.S.-type book-building IPOs and the European-type hybrid IPOs, allocation quotas to investor types in the Indian book-building IPOs and the Indian fixed-price IPOs are 8

predetermined by the regulatory body in India. Specifically, 50% of book-building IPO shares in India are reserved for institutional investors and 50% for retail investors, whereas 50% or more of fixed-price IPO shares are reserved for investors with bids smaller than Indian Rupee (INR) 100,000 (about USD 2,000). Not surprisingly, the majority bids in fixed-price IPOs in India are from retail investors (Marisetty and Subrahmanyam, 2009). In the case of oversubscription, shares from the undersubscribed tranche are placed in the oversubscribed tranche. While allocation of IPO shares to institutional investors and to retail investors in the hybrid IPO auction method in China is also heavily regulated by the regulatory body in China—in that the auction tranche is only open to institutional investors and the subsequent fixed-price tranche is open to all investors—the quotas for the pro-rata allocation of IPO shares to institutional investors and to retail investors in China, unlike in India, are not predetermined by the regulatory body (Cao et al., 2015). In September 2005, the regulatory body in India amended the DIP guidelines. Specifically, the amendment stripped the underwriter of his discretionary allocation power in the book-building issue method. Thus, the shift from the discretionary allocation policy to a non-discretionary allocation policy in India provides a crucial exogenous dimension to the analysis, whereas the January 1, 2004 to August 30, 2007 time-window in India provides a good mix of book-building IPOs (157) and fixed-price IPOs (54). Subsequent to December 31, 2007, the number of fixed-price IPOs in India declined sharply—five fixed-price IPOs in 2008, two fixed-price IPOs in 2012, and zero fixed-price IPOs in 2010 and 2011. Moreover, none of the seven fixed-price IPOs between January 1, 2008 and December 31, 2012 were underwritten with firm-commitment contracts. Beginning in 2012, fixed-price IPOs in India have mostly been listed on a separate Small and Medium Enterprises (SME) platform, whose polices differ from those of the standard stock exchange policies in India.

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2.2.

IPO underpricing in India Bubna and Prabhala (2011) examine the effect of the September 2005 act on IPO

underpricing using a data sample of 124 IPOs (2004-2005), and find that underpricing in bookbuilding IPOs relative to underpricing in fixed-price IPOs is higher in the post-September 2005 nondiscretionary allocation regime than in the pre-September 2005 discretionary allocation regime. They conclude that underwriter discretion promotes price discovery in book-building IPOs. Our study extends the Bubna and Prabhala (2011) study by showing that underpricing is also sensitive to IPO underwriting contracts. Furthermore, we demonstrate that the effect of the September 2005 investor protection regulatory act on IPO underpricing, associated with IPO underwriting contracts in bookbuilding IPOs, is different from that in fixed-price IPOs. Clark et al. (2016) use a larger data sample of 362 book-building IPOs (2003-2014) and find that IPO underpricing is not affected by the September 2005 regulatory act. They find a positive relation between unmet non-institutional investors‘ demand for IPO shares and underpricing in book-building IPOs. They associate the positive relation to investor sentiment and conclude that IPO underpricing is not a voluntary decision. Neupane and Poshkwale (2012) use a sample of 306 book-building IPOs (2001-2010) and examine the influence of institutional investors‘ bidding behavior on retail investors‘ interest. They find that retail investors‘ demands are driven by sentiment, and positively related to institutional investors‘ demands. The also find that underwriters exploit market sentiment and set a high offer price. Brooks et al. (2014) examine IPO underpricing in India using a sample of 240 book-building IPOs and 20 fixed-price IPOs between January 1, 2007 and August 30, 2012, and find that higher when-issued trading generates investor sentiment, which leads to higher subscriptions, which in turn lead to higher IPO underpricing. Our results demonstrate that underpricing in book-building IPOs post-September is attributed to the rational behavior of institutional investors who understate the value of book-building IPOs in 10

the primary market, so they can acquire shares at a low price on the first day of secondary market trading. Deb and Marisetty (2010) use a data sample of 182 book-building IPOs (2006-2009) and examine the effect of mandatory IPO grading, introduced in May 2007, on IPO underpricing. They find that grading reduces IPO underpricing. To exclude the effect of the mandatory IPO grading policy on IPO underpricing, we chose August 30, 2007 as the cutoff date for our data sample. Our data sample (2004-2007) is short enough to capture the effect of the September 2005 regulatory change without the effects of other regulatory changes on IPO underpricing, and long enough to include sufficient observations in the data sample.

3.

Hypothesis development In the asymmetric information framework of Benveniste and Spindt (1989), underwriters‘

control over allocation of book-building IPO shares allows them to incentivize well-informed institutional investors in the primary market to truthfully reveal their private information about the IPO. Hanley (1993) and Bradley and Jordan (2002) empirically show that underwriters of bookbuilding IPOs partially adjust IPO share prices to public information to compensate institutional investors for reporting their private information, thereby reducing information asymmetry in the IPO market. Thus, notwithstanding IPO underpricing associated with the partial price adjustment to information phenomenon, and with other factors, such as firm-specific factors, IPO-specific factors, industry-specific factors, and year-specific factors, we argue that discretionary allocation of IPO shares to institutional investors in markets with well-developed institutions and well-informed institutional investors lowers underpricing in book-building IPOs. Thus, we hypothesize:

H1:

Favorable allocation of IPO shares to institutional investors lowers underpricing in bookbuilding IPOs underwritten with firm-commitment contracts. 11

Busaba and Chang (2010) argue that unless a small subset of informed investors participates in book-building offerings, the potential for profit in the secondary market adversely affects informed investors‘ bids for shares in the primary market. Stated differently, if informed investors are less certain about receiving favorable allocations in the primary market, they will understate the value of IPOs by bidding low in the primary market and seek to profit from mispricing in the secondary market. In the Busaba and Chang (2010) framework, underpricing in book-building IPOs is higher than in fixed-price IPOs, when the number of institutional investors participating in bookbuilding IPOs in the primary market is higher than the number of available IPO shares. Following Busaba and Chang‘s (2010) line of reasoning, we argue that when informed institutional investors are uncertain about receiving favorable allocations in the primary market, they are likely to bid low in the primary market, so they can increase their chances of acquiring shares at a low price in the secondary market. This strategy is especially rewarding if the number of bids for book-building IPO shares in the primary market is higher than the number of available IPO shares. Indeed, it can be argued that retail investors might anticipate such an action and engage in a counter strategy in which they do not trade their IPO shares until a later date. However, beyond their inferior strategic capabilities, retail investors are less likely to engage in such a strategy because the strategy could expose them to the winner‘s curse, i.e., the strategy would result in less-informed retail investors overpaying for IPO shares (Rock, 1986; Jagannathan et al., 2015). Thus, we argue that —conditional on a well-functioning equity market, i.e., a market with well-developed institutions and wellinformed institutional investors— underpricing in book-building IPOs underwritten with firmcommitment contracts is higher when institutional investors are less certain about receiving favorable allocations, such as in the post-September 2005 non-discretionary allocation and high investor protection period in India, than when institutional investors are more certain about receiving 12

favorable allocations, such as in the pre-September 2005 discretionary allocation and low investor protection period. Therefore, we hypothesize:

H2:

Investor protection increases underpricing in book-building IPOs underwritten with firmcommitment contracts.

Acknowledging that institutional investors play an inconsequential information production role in fixed-price IPOs in India, we further argue that underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower in the post-September 2005 period characterized by a high level of investor protection, than in the pre-September 2005 period characterized by a low level of investor protection. Thus, we hypothesize:

H3:

Investor protection lowers underpricing in fixed-price IPOs underwritten with firmcommitment contracts.

Ritter (1987) and Booth and Smith (1986) posit that IPO underpricing is positively related to underwriters‘ risk in the IPO, suggesting that underpricing is higher in IPOs underwritten with firmcommitment contracts than with best-efforts contracts. Consistent with their arguments, we argue that, regardless of the issue method, underpricing is higher in IPOs underwritten with firmcommitment contracts than underpricing in IPOs underwritten with best-efforts contracts. Thus, we hypothesize:

H4:

Ceteris paribus, IPOs underwritten with firm-commitment contracts have higher underpricing than IPOs underwritten with best-efforts contracts. 13

4.

IPO underpricing with and without well-informed institutional investors In this section, we develop an IPO underpricing framework in which we disentangle the

effect of institutional investors‘ incentive on IPO underpricing from the effect of underwriters‘ risk in underwriting contracts. We conjecture that, in markets with well-informed institutional investors, the information production benefits of favorable allocation of book-building IPO shares to institutional investors outweigh the investor protection benefits of non-discretionary allocation of IPO shares. Conversely, in markets with less-informed institutional investors, the investor protection benefits of non-discriminatory allocation of book-building IPO shares outweigh the benefits of discretionary allocation of IPO shares to less-informed institutional investors. Thus, policymakers worldwide are faced with the challenge of weighing the benefits of investor protection against the benefits of information production when deciding on allocation policies. Figure 1 and Figure 2 in Appendix B illustrate the effect of institutional investors‘ incentive for information reporting and the effect of underwriters‘ risk in underwriting contracts on IPO underpricing in markets with wellinformed institutional investors and in markets with less-informed institutional investors, respectively. Table A in Figure 1 shows that underpricing is lowest in book-building IPOs underwritten with best-efforts contracts in markets with well-developed institutions, well-informed investors, and a discretionary allocation policy. The lowest level of book-building underpricing is attributed to 1) institutional investors‘ incentive for truthfully revealing their private information, and 2) reduced risk to underwriters in IPOs underwritten with best-efforts contracts. Conversely, the level of underpricing is highest in fixed-price IPOs underwritten with firm-commitment contracts. The high level of underpricing is attributed to 1) marginal institutional participation in fixed-price IPOs, and 2) increased underwriters‘ risk in firm-commitment contracts. Table A in Figure 1 also shows that the 14

level of underpricing in book-building IPOs and in fixed-price IPO is higher, Low-Medium and High, respectively, with firm-commitment contracts than with best-efforts contract, indicating that underpricing is higher in firm-commitment contracts, regardless of the issue method. Table B in Figure 1 illustrates the impact of investor protection on IPO underpricing in markets with well-developed institutions, well-informed institutional investors, and a nondiscriminatory investor protection policy. Compared with the pre investor protection act period, the relatively low level of fixed-price IPO underpricing is attributed to investor protection, and the relatively high level of book-building IPO underpricing is attributed to institutional investors‘ incentive to understate the value of the IPO. In capital markets characterized by informed institutional investors, the illustrations in Figure 1 are aligned with hypotheses H1, H2, H3, and H4. Figure 2 in Appendix B illustrates the effects of underwriting contracts and allocation policies on underpricing in book-building IPOs and in fixed-price IPOs, in markets characterized by high investor protection benefits and low information production benefits. This setting includes markets with less-developed institutions, less-informed institutional investors, conflicts of interest problems between underwriters and issuers or collusion problems between underwriters and investors, which are detrimental to both issuers and retail investors (Biais et al. , 2002). Both Table A and Table B in Figure 2 show that underpricing is indistinguishable between fixed-price IPOs and book-building IPOs. Additionally, the tables demonstrate that underpricing is lower in the investor protection period than it is in the pre investor protection policy period. In sum, the two figures in Appendix B illustrate an IPO underpricing framework useful for determining whether the benefits of information production incentive in the market of interest outweigh the benefits of investor protection, or vice versa. In the Indian IPO market context, we conjecture that Figure 1 represents the relevant setting to our empirical analysis.

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5.

Data The data sources are PRIME database, Thomson Reuters SDC Platinum, Wharton Research

Data Services (WRDS) COMPUSTAT Global, and Yahoo Finance.4 The data sample consists of 157 book-building IPOs and 54 fixed-priced IPOs listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) from January 1, 2004 to August 30, 2007. The sample size and the sample period closely match the sample size and the sample period (2004-2006) used in the study by Bubna and Prabhala (2011). An important distinction in our data sample is that it includes observations for IPOs underwritten with firm-commitment and best-efforts contracts. Secondary equity offerings and offerings on the other smaller stock exchanges in India are excluded from the overall sample. The final sample size consists of 211 IPOs. Descriptive statistics of all the variables used in the analysis are reported in Table A.2., Appendix A. Table 1 reports the distributions of firmcommitment contracts and best-efforts contracts in book-building IPOs and in fixed-price IPOs across the two regimes, and the descriptive statistics of the key variables used in the analysis.

Panel A in Table 1 shows the descriptive statistics for the variables IPO shares, Firm size, and IPO underpricing of twelve fixed-price IPOs underwritten using firm-commitment contracts, and 42 fixed-price IPOs underwritten using best-efforts contracts. The variables are defined in detail in Table A.1., Appendix A. Panel B in Table 1 shows the descriptive statistics for the variables IPO shares, Firm size, Book-building price revisions, and IPO underpricing of 154 book-building IPOs underwritten using firm-commitment contracts, and three book-building IPOs underwritten using 4

www.primedatabase.com; financial.thomsonreuters.com; https://wrds-web.wharton.upenn.edu/wrds/; http://finance.yahoo.com .

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best-efforts contracts. The means and medians of IPO shares and Firm size in Table 1 indicate that book-building IPOs are larger in size than fixed-price IPOs, suggesting that it is important to control for size variables in the analyses. Table 1 also shows that the means and medians of IPO underpricing in fixed-price IPOs underwritten with firm-commitment contracts are higher than bookbuilding IPOs underwritten using the same. Acknowledging that descriptive statistics do not suggest causal relations, the statistics reported in Table 1 are nevertheless aligned with the arguments in our hypotheses. As a next step in our data examination, we conduct mean differences tests to examine whether the differences in the key characteristics between book-building IPOs and fixed-price IPOs and between IPOs underwritten with firm-commitment contracts and IPOs underwritten with bestefforts contracts are statistically significantly different. Table 2 reports the results of the mean differences tests.

Panel A in Table 2 reports the t-test results for the differences in IPO shares, Firm size, and IPO underpricing between fixed-price IPOs underwritten with firm-commitment contracts and fixedprice IPOs underwritten with best-efforts contracts in the 2004-2007 period in India. Panel B in Table 2 reports the t-test results for the differences in IPO shares, Firm size, Book-building price revision, and IPO underpricing between book-building IPOs underwritten with firm-commitment contracts and book-building IPOs underwritten with best-efforts contracts in the 2004-2007 period in India. Panel C in Table 2 reports the t-test results for the differences in IPO shares, Firm size, and IPO underpricing, between book-building IPOs and fixed-price IPOs underwritten with firmcommitment contracts in the 2004-2007 period. Cognizant of the fact that the results shown in Table 17

2 are not a replacement for causal analysis, the statistically significant and positive difference (0.58) between underpricing in fixed-price IPOs underwritten with firm-commitment contracts and fixedprice IPOs underwritten with best-efforts contracts in Panel A are consistent with hypothesis H4.

6.

Empirical analysis and results In this section, we test our hypotheses of underpricing in book-building IPOs and in fixed-price

IPOs, that are underwritten with firm-commitment contracts and best-efforts contracts, under a discretionary allocation policy and under a non-discretionary investor protection policy, in the January 1, 2004 to August 30, 2007 period in India. We begin our analysis by conducting Ordinary Least Square (OLS) regressions using the entire data sample (211 IPOs). The regression model is as follows:

IPO underpricing   0 Book  Building dummy  1 Firm  Commitment dummy  2 Post 2005 dummy  3 Control variables  

(1)

If institutional investors in India are well-informed, we would expect Book–building dummy to be negatively related to IPO underpricing. This negative relation on its own would imply that, under the pre-September 2005 discretionary allocation policy, underpricing is lower in book-building IPOs underwritten with best-efforts contracts than in fixed-price IPOs underwritten with best-efforts contracts. We would also expect Firm-commitment dummy to be positively related to IPO underpricing. This positive standalone relation would imply that, regardless of the issue method and the regulatory policy, underpricing is higher in IPOs underwritten with firm-commitment contracts than in IPOs underwritten with best-efforts contracts. This result would be consistent with the argument that IPO prices are discounted for underwriters‘ risk in firm-commitment contracts, and 18

thereby support hypothesis H4. Table 3 reports the results of the OLS regression analyses based on Equation (1) using both book-building IPOs and fixed-price IPOs listed on the BSE and NSE in the January 1, 2004—August 30, 2007 period in India. The variables shown in the table are fully defined in Table A.1., Appendix A. The three regression models shown in Table 3 control for industry fixed effects and year fixed effects.

Models (1) and (2) in Table 3 use a data sample of 211 IPOs (157 book-building IPOs and 54 fixed-price IPOs) that were traded for the first time on the BSE and the NSE between January 1, 2004 and August 30, 2007, whereas models (3) and (4) use a data sample of 197 IPOs and 187 IPOs, respectively, that were filed with the SEBI between January 1, 2004 and August 30, 2007, and traded for the first time in the same period.5 Model (3) includes several control proxy variables for IPO certification, i.e., underwriter reputation—Underwriter rep dummy, auditor reputation—Auditor rep dummy, whether the IPO is backed by venture capital—VC back dummy, and business group affiliation—Group affiliation dummy; and controls for market conditions, i.e., Hot IPO market—Hot IPO market, and past market return—Market return. Model (4) also includes control proxy variables for listing-time IPO accounting characteristics, e.g., earnings to total assets ratio—EBIT to TA, debt to total assets ratio—Leverage, and market value of equity to its book value—MTB. All the controls are commonly used in emerging market IPO studies (Ibbotson et al., 1994; Lowry and Schwert, 5

Six fixed-price IPOs (five underwritten with firm-commitment contracts and one underwritten with bestefforts contract) that traded for the first time on the NSE and the BSE between January 1, 2004 and August 30, 2007 were filed with the SEBI prior to January 1, 2004. These IPOs are not included in Model (3) and Model (4) in Table 3.Additionally , IPOs with incomplete information or IPOs that are not in the WRDS and SDC databases —because they were acquired or they did not survive etc., are also not included in Model (3) and Model (4) in Table 3.

19

2002; Demers and Joos, 2007; Espenlaub et al., 2016; Gopalan et al., 2007; Khanna and Palepu, 2000).6 The variables are fully defined in Table A.1., Appendix A. The statistically significant and negative coefficients, -0.86, -0.80, -0.79, and -0.88, for Bookbuilding dummy in regression models (1), (2), (3), and (4), respectively, and the statistically significant and positive coefficient of 0.73, 0.73, 0.58, and 0.63 for Firm-commitment dummy in models (1), (2), (3), and (4), respectively, in Table 3 are consistent with the predictions of hypothesis H4. The statistically significant and positive coefficients for Book-building price revision in all four regression models in Table 3 are consistent with the partial price adjustment to information phenomenon as first documented for US IPOs by Hanley (1993). Interestingly, the statistically significant and negative coefficients, -0.35, -0.33, -0.47, and -0.51, for Post 2005 dummy in models (1), (2), (3), and (4), respectively, imply that investor protection reduces IPO underpricing in India. However, it is important to note that the effect of Post 2005 dummy on underpricing in book-building IPOs, relative to fixed-price IPOs; and on underpricing in IPOs underwritten with firm-commitment contracts, relative to IPOs underwritten with best-efforts contracts, are not apparent from the statistically significant and negative coefficients for the Post 2005 dummy variable in the regression models shown in Table 3. To test for the effects of Post 2005 dummy on the issue methods and on the underwritten contracts, we introduce an interaction term in our OLS regressions using a subsample of IPOs excluding IPOs that are underwritten with best-efforts contracts. The regression model is as follows:

6

Ibbotson et al. (1994) and Lowry and Schwert (2002) demonstrate a lead-lag relationship between the number of new issues per month and the average initial return per month. Demers and Joos (2007) posit that Hot market periods are likely to attract low quality IPOs. Espenlaub (2016) demonstrate that IPO survival is positively affected by underwriter reputation, auditor reputation, and venture capitalist backing. Gopalan et al. (2007) and Khanna and Palepu (2000) demonstrate that business group firms perform better than unaffiliated firms in emerging markets, such as India.

20

IPO underpricing   0 Book  Building dummy  1 Post 2005 dummy  2 Book  Building  Post 2005 dummy  3 Control variables  

(2)

As in Equation (1), we expect to see an inverse relation between Book-building dummy and IPO underpricing in Equation (2). Furthermore, we expect to see a positive relation between the interaction Book-building × Post 2005 dummy and IPO underpricing. The positive relation would be consistent with the argument that institutional investors are likely to understate the value of the IPO if they are uncertain about receiving favorable allocation of book-building IPO shares in the primary market. The positive relation would therefore support hypotheses H1 and H2. Table 4 reports the results of the OLS regressions using a subsample of book-building IPOs and fixed-price IPOs underwritten with firm-commitment contracts. Models (1) and (2) use a data sample of 154 book-building IPOs underwritten with firm-commitment contracts and twelve fixed-price IPOs underwritten with firm-commitment contracts that traded for the first time on the BSE and NSE between January 1, 2004 and August 30, 2007. Model (3) and Model (4) use a data sample of 158 IPOs and 152 IPOs, respectively, that were filed with the SEBI between January 1, 2004 and August 30, 2007.7 The variables presented in Table 4 are defined in Table A.1., Appendix.

The statistically significant negative coefficients, -1.66, -1.63, -1.65, and -1.64, for Bookbuilding dummy in regression models (1), (2), (3), and (4), respectively, suggest that underpricing is lower in book-building IPOs underwritten with firm-commitment contracts than in fixed-price IPOs 7

The data sample used in Model (3) of Table 4 excludes IPOs that did not survive or that have missing data in WRDS-COMPUSTAT Global and SDC databases.

21

underwritten with firm-commitment contracts. The statistically significant and positive coefficients, 0.93, 99, 0.98, and 0.97, for the Book-building × Post 2005 dummy interaction term in regression models (1), (2), (3), and (4), respectively, together with the statistically significant and negative coefficients, -1.26, -1.30, -1.36, and -1.35, for the Post 2005 dummy variable in regression models (1), (2), (3), and (4), respectively, imply that underpricing in book-building IPOs underwritten with firm-commitment contracts is higher under a non-discretionary allocation policy, than under a discretionary allocation policy. Thus, the results support hypotheses H1 and H2. Next, we conduct tests for the effect of the post-September 2005 investor protection policy on fixed-price IPOs underwritten with firm-commitment contracts relative to fixed-price IPOs underwritten with best-efforts contracts. The regression model is as follows:

IPO underpricing   0 Firm  Commitment dummy  1 Post 2005 dummy  2 Firm  Commitment  Post 2005 dummy  3 Control variables  

(3)

As in Equation (1), we expect Firm-commitment dummy to be positively related to IPO underpricing in Equation (3). We also expect the interaction Firm-commitment × Post 2005 dummy to be inversely related to IPO underpricing. The inverse relation would imply that investor protection lowers underpricing in fixed-price IPOs underwritten with firm-commitment contracts, which would be consistent with hypothesis H3. Table 5 reports the results of the OLS regression analysis using a subsample of fixed-price IPOs. Models (1) and (2) use a data sample of 54 fixedprice IPOs that traded for the first time on the BSE and the NSE between January 1, 2004 and August 30, 2007. Model (3) and Model (4) use a data sample of 47 fixed-price IPOs 44 fixed-price IPOs that were filed with the SEBI between January 1, 2004 and August 30, 2007. The Ln (Firm size) variable is excluded from Model (3) because it is correlated to the Group affiliation dummy 22

variable. The MTB variable is excluded from Model (3) and Model (4) because it is correlated to the Group affiliation dummy variable, the Ln (IPO shares) variable, the EBIT to TA variable, and the Leverage variable. Similarly, the Auditor rep dummy variable is excluded from the regression models because of severe multicollinearity. The variables shown in Table 5 are defined in Table A.1., Appendix A . All four regressions in Table 5 control for industry fixed effects and year fixed effects.

The statistically significant and positive coefficients, 1.66, 1.56, 1.33, and 1.60, for Firmcommitment dummy in regression models (1), (2), (3), and (4), respectively, and the statistically significant negative coefficients, -0.95, -0.81, 0.74, and -1.12, for the Firm-commitment × Post September 2005 dummy interaction term in regression models (1), (2), (3), and (4), respectively, together imply that underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower in the post-September 2005 high investor protection period, than in the pre-September 2005 low investor protection period. Thus, the results support hypothesis H3.

7.

Endogeneity tests Following Angrist and Pischke (2008), we address endogeneity concerns due to unobservable

sample differences —such as differences in institutional investor quality and differences in underwriter reputation— by conducting two sets of difference-in-differences (henceforth also DiD) analyses. In both sets of our DiD analyses, we cluster the standard errors at group level (year and industry) to address the concern for understated standard deviation of the estimators, as pointed out by Bertrand et al. (2004). The ―base-line‖ (BL) period in both sets is the discretionary allocation period (2004-2005); the ―follow-up‖ (FU) period is the non-discretionary allocation period (200523

2007). The ―treated‖ IPOs in the first DiD set are book-building IPOs underwritten with firmcommitment contracts, while the ―control‖ IPOs are fixed-price IPOs underwritten with firmcommitment contracts. The treated IPOs in the second DiD set are fixed-price IPOs underwritten with firm-commitment contracts, while the control IPOs are fixed-price IPOs underwritten with bestefforts contracts. The results of the two DiD analyses are reported in Table 6 and Table 7, respectively.

[Insert Table 6 and Table 7 about here]

Table 6 reports the DiD estimation results for 147 book-building IPOs underwritten with firm-commitment contracts and eleven fixed-price IPOs that are also underwritten with firmcommitment contracts, and listed on the NSE and the BSE in India (filed with the SEBI between January 1, 2004 and August 30, 2007). The outcome (dependent) variable in the DiD analysis is IPO underpricing and the covariates are Ln (Firm size), which is the natural logarithm of the Firm size variable, Ln(IPO shares), which is the natural logarithm of the IPO shares variable, Underwriter rep dummy, Auditor rep dummy, VC back dummy, Group affiliation dummy, Hot IPO market dummy, and Market return. The variables are fully defined in in Table A.1., Appendix A. The DiD measures are estimated using OLS regressions with respect to the discretionary allocation regime (BL) and the non-discretionary allocation regime (FU). The statistically significant and negative coefficients, 1.47 for Diff(BL) and -0.47 for Diff(FU), in Table 6 suggest that underpricing in the pre and postSeptember 2005 discretionary allocation period is lower in book-building IPOs underwritten with firm-commitment contracts than in fixed-price IPOs underwritten with firm-commitment contracts. The statistically significant and positive coefficient, 1.00 for DiD, in Table 6 suggests that underpricing in book-building IPOs, relative to underpricing in fixed-price IPOs, is higher in the 24

post-September 2005 non-discretionary allocation period than in the pre-September 2005 discretionary allocation period. These results support the estimations from OLS regressions reported in Model (3) of Table 4 and address the concern that IPOs in the data sample may not be comparable between the two regimes. Table 7 reports the DiD estimation results for 47 fixed-price IPOs that are either underwritten with firm-commitment contracts or with best-efforts contracts, and listed on the NSE and BSE in India (filed with the SEBI between January 1, 2004 and August 30, 2007). The outcome (dependent) variable is the IPO underpricing variable; the covariates are the same as in Model (3) of Table 5, The DiD measures are estimated using OLS regressions with respect to the discretionary allocation regime (BL) and the non-discretionary allocation regime (FU). The statistically significant and positive result, 1.34, for Diff(BL), implies that underpricing is higher in fixed-price IPOs underwritten with firm-commitment contracts than with best-efforts contracts in the pre-September 2005 period.. The statistically significant and negative result, -0.74, for DiD in Table 7 implies that underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower in the postSeptember 2005 period than in the pre-September 2005 period. Overall, the results reported in Table 7 support the results reported in the OLS regressions in Model (3) of Table 5, and address the endogeneity concern due to unobservable firm characteristics correlated to the underwriting contract. Next, we address selection bias due to observable sample differences not controlled for in our regression models. We employ a propensity-score-matching (henceforth PSM) technique in which we match treated IPOs - namely, IPOs underwritten with firm-commitment contracts - with control IPOs - namely, fixed-price IPOs and IPOs underwritten with best-efforts contracts, using the nearest neighbor matching procedure, as in Dehejia and Wahba (2002). We estimate the propensity score for each IPO using the predicted probabilities from a Probit regression model, and match each treated IPO to a control IPO by IPO shares, using the nearest neighbor matching procedure. We use 25

matching with replacement to minimize the propensity score distance between the matched control IPO and the treated IPO (Dehejia and Wahba, 2002). The PSM technique requires that the outcome variable (IPO underpricing) is independent of treatment (book-building or firm-commitment) conditional on the propensity score. Hence, it is important to choose a set of variables X that credibly satisfy this condition. On the one hand, omitting important variables increases the likelihood of bias in the estimates (Heckman et al., 1997). On the other hand, ‗extreme level of matching‘ is not helpful either. Stated differently, in case P(X) = 0 or P(X) = 1; for some values of X, we cannot implement proper matching conditionally on these X values to estimate a treatment effect, because firms with such characteristics either always or never receive a treatment. Hence, the common support condition fails and matches cannot be performed. Some randomness is, therefore, needed to guarantee that firms with identical characteristics can be observed in both states (Heckman et al., 1998). Acknowledging the tradeoff in omitted variables, we choose to match by IPO shares in our PSM design. The results of the PSM analysis are reported in Table 8 and Table 9.

[Insert Tables 8 and 9 about here]

Table 8 reports the PSM estimation results using the Probit procedure for treated bookbuilding IPOs and control fixed-price IPOs in the pre-September discretionary allocation period (Panel A) and in the post-September 2005 investor protection period (Panel B). Table 9 reports the PSM estimation results using the Probit procedure for treated firm-commitment fixed-price IPOs and control best-efforts fixed-price IPOs in the pre-investor protection period (Panel A) and in the postSeptember 2005 investor protection period (Panel B). The balancing properties in the Probit regression models in Table 8 and Table 9 are satisfied, and each analysis is restricted to treated IPOs 26

and control IPOs in the common region of support. The post-match average treatment effect on the treated in Panel A of Table 8 is statistically significant and negative (-1.62), whereas in Panel B, it is statistically not significant. These results imply that, after matching by IPO shares, underpricing in book-building IPOs underwritten with firm-commitment contracts is indeed lower than underpricing in fixed-price IPOs underwritten with firm-commitment contracts in the discretionary allocation period (2004-2005). Thus, the results are in line with those reported in Table 4 and in Table 6. Moreover, the post-match PSM results reported for fixed-price IPOs in Table 9 are statistically significant (0.58) in the non-discretionary period (Table 9, Panel B), and statistically not significant in the discretionary allocation period (Table 9, Panel A). These results are in line with those reported in Table 5 and Table 7. Overall, our DiD analysis and PSM analysis strongly support the results reported in our OLS regressions and thereby, the predictions of our hypotheses.

8.

Discussion In this section, we discuss our results in relation to Figure 1 and Figure 2 in Appendix B. The

discussion aims to demonstrate 1) that institutional investors in India are well-informed, 2) that the IPO market in India is conducive to information production, and 3) that the benefits of information production incentive in India outweigh the benefits of investor protection. The key IPO participants in almost all IPOs in equity markets around the world are the issuers, the underwriting investment banks, and the investors, i.e., the institutional investors and the retail investors. Conditional on the issue method and the IPO underwriting contract, each IPO participant bears a certain level of IPO-related risk. IPO underpricing compensates IPO participants for taking a risk on the IPO. IPO underpricing also compensates IPO participants for information production. Therefore, a major challenge facing researchers examining IPO underpricing is to disentangle the compensation components in IPO underpricing, i.e., the compensation for risk and the compensation 27

for reward. While the compensation for reward to institutional investors for reporting information is captured in the partial price adjustment to information phenomenon in book-building IPOs (Hanley, 1993), the compensation for underwriters‘ risk in underwriting contracts is difficult to empirically capture in the majority of markets around the world. One such example is the U.S. market, in which book-building is the predominant issue method and firm-commitment is the predominant underwriting contract. Although the auction issue method continues to be available to issuers in the US, it is significantly less popular than the book-building method. The number of firms that chose the auction IPO method in the US between 1999 and 2007 is nineteen (Degeorge et al., 2010). In contrast to the majority of IPO markets in developed countries, which either offer a version of the U.S. type book-building IPO method or a version of the U.K. type fixed-price IPO method to firms going public, the Indian IPO market offers both methods and two distinct types of underwriting contracts to issuers. The risk of unsold IPO shares in firm-commitment contracts is borne by the underwriter, whereas the risk of unsold shares in best-efforts contracts is borne by the issuer. If IPOs are discounted to account for underwriters‘ risk, then underpricing should be higher in IPOs underwritten with firm-commitment contracts than IPOs underwritten with best-efforts contracts. Indeed, the statistically significant and positive coefficients for the Firm-commitment dummy variables in Table 3 and Table 5, and the statistically significant and positive coefficient for the best efforts versus Firm Commitment difference variable (Diff variables) in Table 7, strongly support this argument. However, it is important to note that the standalone discount for underwriters‘ risk in firmcommitment contracts does not tell us whether the IPO market of interest has well-developed institutions and well-informed institutional investors. Both Figure 1 and Figure 2 show that, ceteris paribus, underpricing is higher in IPOs underwritten with firm-commitment contracts than in IPOs underwritten with best-efforts contracts.

28

If IPOs are discounted to account for investors‘ risk, then, after controlling for the partial price adjustment to information phenomenon, underpricing in book-building IPOs should be lower than in fixed-price IPOs. Indeed, the results in Table 3, Table 4, and Table 6 show that, ceteris paribus, underpricing in book-building IPOs underwritten with firm-commitment contracts is lower than underpricing in fixed-price IPOs underwritten with firm-commitment contracts. However, it should be noted that these results do not tell us how underpricing in the two issue methods are affected by the September 2005 regulatory act in India. This information is important in determining whether the benefits of the investor protection policy in the market of interest exceed the benefits of information production incentive (Figure 1, Appendix B), or vice versa (Figure 2, Appendix B). The results in Table 4, Table 6, and Table 8, demonstrate that underpricing in book-building IPOs underwritten with firm-commitment contracts is higher in the post-September 2005 investor protection period than in the pre-September 2005 information production incentive period. Conversely, the results in Table 5, Table 7, and Table 9, demonstrate that underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower in the post-September 2005 high investor protection period than in the pre-September 2005 low investor protection period. These findings are consistent with Figure 1 in Appendix B, but not with Figure 2 in Appendix B. Thus, we conclude that institutions in India are fairly well-developed, institutional investors are rather wellinformed, and the benefits of information production incentive outweigh the benefits of investor protection.

9.

Conclusion In this paper, we demonstrate how institutional investors whose bids do not receive favorable

allocations in the primary market are likely to understate the value of IPO shares, so they can acquire shares at a low price in the secondary market. Using a unique IPO dataset (2004–2007 in India) with 29

exogenous investor protection, we show that underpricing in book-building IPOs underwritten with firm-commitment contracts is relatively higher in the post-September 2005 non-discretionary allocation period than in the pre-September 2005 discretionary allocation period. We also demonstrate that underpricing in fixed-price IPOs underwritten with firm commitment contracts is relatively lower in the post-September 2005 investor protection period than in the pre-September 2005 discretionary allocation period. These findings suggest that the institutional setting in India is conducive to information production and that institutional investors positively contribute to price discovery under a policy that favors allocations to institutional investors, and negatively contribute to price discovery under a policy that favors non-discretionary allocation. Thus, our findings demonstrate a tradeoff in allocation policy between information production and investor protection.8 While the September 2005 regulatory act in India, geared toward investor protection, deters ―discriminatory‖ allocation, the act also adversely affects information production in the bookbuilding IPO market.

8

John et al. (2016) find that PIPE issues with investor protection, such as convertible debts with floating or reset features, adversely affect firm value. Pellegrina and Saraceno (2011) find that banks subjected to securities class actions (SCAs) have reduced risk positions, suggesting that SCAs play a complementary role to public supervisory activity in the banking sector.

30

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Gopalan, R., Nanad, V., and Seru A., 2007. Affiliated firms and financial support: Evidence from Indian business groups. Journal of Financial Economics 86, 759-795. Hanley, K., 1993, The underpricing of first-day public offerings and the partial adjustment phenomenon, Journal of Financial Economics 34, 231-250. Heckman, J., Ichimura, H., and Smith, J., 1998. Characterizing selection bias using experimental data, Econometrica 66, 1017-1098. Heckman, J., Ichimura, H., and Todd, P., 1997. Matching as an econometric evaluation estimator: Evidence from evaluating a job training program, Review of Economics Studies 64, 605-654. Ibbotson, R., G., Sindelar, J. L., and Ritter, J. R., 1994. The market‘s problems with the pricing of initial public offerings. Journal of Applied Corporate Finance 7, 66-74. Imbens, G. W., and Wooldridge, J. M., 2009, Recent developments in the econometrics of program evaluation, Journal of Economic Literature 47, 5-86. Jagannathan, R., Jirnyi, A., Sherman, A., 2015. Share auctions of initial public offerings: Global evidence. Journal of Financial Intermediation 24, 283-311. John, K., Mateti, R. S., Vasudevan, G., Amira, K., 2016. Investor protection and firm value: Evidence from PIPE offerings. Journal of Financial Stability 26, 78-89. Khanna, T., and Palepu, K., 2000. Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. Journal of Finance 55, 867-891. Lowry, M., and Schwert, G. W., 2002. IPO market cycles: Bubbles or sequential learning. Journal of Finance 3, 1171-1200. Marisetty, V., and Subrahmanyam, M., 2010. Group affiliation and the performance of initial public offerings in Indian stock market. Journal of Financial Markets 13, 196-223. Neupane, S., and Poshakwale, S. S., 2012. Transparency in IPO mechanism: retail investors‘ participation, IPO pricing and returns. Journal of Banking and Finance 36, 2064-2076. 33

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34

Table 1:

Distribution of fixed-price IPOs and book-building IPOs in the sample and the descriptive statistics of the key variables used in the analysis

Panel A:

54 Fixed-price IPOs (2004-2007) Mean

Median

Max

Min

17.38

14.73

Firm-commitment (12) Ln (IPO shares)

15.81

15.69

Ln (Firm size)

20.38

20.39

21.10

19.65

IPO underpricing Best-efforts (42)

0.89

0.63

2.57

0.01

Ln (IPO shares)

15.61

15.61

18.42

14.22

Ln (Firm size)

19.96

20.00

23.01

17.73

IPO underpricing

0.31

0.13

2.36

-0.54

Panel B:

157 Book-building IPOs (2004-2007) Mean

Median

Max

Min

20.58

14.55

Firm-commitment (154) Ln (IPO shares)

16.12

15.82

Ln (Firm size)

22.41

22.03

27.52

20.06

Book-building price revision

0.05

0.06

0.09

-0.09

IPO underpricing Best-efforts (3)

0.29

0.18

2.35

-0.41

Ln (IPO shares)

17.74

17.35

18.54

17.34

Ln (Firm size)

23.58

24.18

25.40

21.15

Book-building price revision

0.07

0.07

0.08

0.06

IPO underpricing

0.18

0.12

0.32

0.11

Panel A in Table 1 presents the descriptive statistics (mean, median, minimum, maximum) for 54 fixed-price IPOs with firm-commitment (12 IPOs) and with best-efforts (42 IPOs) listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India in the January 1, 2004 to August 30, 2007 period. Panel B in Table 1 presents the descriptive statistics for 157 book-building IPOs with firm-commitment (154 IPOs) and with best-efforts (3 IPOs listed on the BSE and the NSE in India) in the January 1, 2004 to August 30, 2007 period.

35

Table 2:

Mean differences tests (t-tests)

Panel A:

Fixed-price IPOs (2004-2007)

Ln (IPO shares)

Firm-commitment 5.81

Best-efforts 15.61

Ln (Firm size)

20.38

19.96

IPO underpricing

0.89

0.31

Panel B:

Book-building IPOs (2004-2007) Firm-commitment 16.12

Best-efforts 17.74

Ln (Firm size)

22.41

23.58

Book-building price revision

0.05

0.07

IPO underpricing

0.29

0.18

Ln (IPO shares) 1.62**

Panel C:

Difference 0.20 (0.233) 0.42 (0.267) 0.58*** (0.207)

Difference (0.701) -1.17 (0.843) -0.02 (0.028) 0.11 (0.267)

Firm-commitment IPOs (2004-2007)

Ln (IPO shares)

Fixed-price 15.81

Book-building 16.12

Ln (Firm size)

20.38

22.41

IPO underpricing

0.89

0.29

Difference -0.31 (0.355) -2.03*** (0.416) 0.60*** (0.149)

Panel A in Table 2 presents the mean variance t-tests for fixed-price IPOs with firm-commitment (12 IPOs) and with best-efforts (42 IPOs) listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India in the January 1, 2004 to August 30, 2007 period. Panel B in Table 2 presents the mean variance t-tests for book-building IPOs with firm-commitment (154 IPOs) and with best-efforts (3 IPOs) listed on the BSE and the NSE in India in the January 1, 2004 to August 30, 2007 period. Panel C in Table 2 presents the mean variance t-tests for book-building IPOs (157 IPOs) and for fixed-price IPOs (54 IPOs) listed on the BSE and the NSE in India in the January 1, 2004 to August 30, 2007 period.

36

Table 3. All book-building IPOs and fixed-price IPOs in India (2004–2007)

Dependent variable: IPO underpricing Intercept

Model (1)

Model (2)

Model (3)

Model (4)

0.79 (0.669) -0.07 (0.445)

0.58 (0.588)

-0.86*** (0.205) 0.73*** (0.162) -0.35*** (0.104) 2.67*** (0.683)

-0.80*** (0.213) 0.73*** (0.164) -0.33*** (0.103) 2.46*** (0.655)

1.55 (0.965) -0.11* (0.061) -0.01 (0.036) 0.11 (0.116) 0.24** (0.120) -0.09 (0.122) -0.19 (0.184) -0.45 (0.418) 1.75 (1.388) -0.79*** (0.254) 0.58*** (0.168) -0.47*** (0.108) 2.67*** (0.926)

Industry fixed effect Year fixed effect

Yes Yes

Yes Yes

Yes Yes

1.75* (0.917) -0.12* (0.068) 0.01 (0.042) 0.09 (0.125) 0.23* (0.135) -0.07 (0.125) 0.19 (0.196) -0.67 (0.430) 2.36 (1.467) -0.88*** (0.276) 0.63*** (0.179) -0.51*** (0.110) 3.09*** (1.105) 0.01 (0.001) 0.01 (0.002) 0.01 (0.001) Yes Yes

Adjusted R2

0.27

0.26

0.32

0.34

Observations

211

211

197

187

Ln (IPO shares) Ln (Firm size)

-0.04 (0.030)

Underwriter rep dummy Auditor rep dummy VC back dummy Group affiliation dummy Hot IPO market Market return Book-building dummy Firm-commitment dummy Post 2005 dummy Book-building price revision EBIT to TA Leverage MTB

Table 3 reports the regression results for book-building IPOs and fixed-price IPOs listed on the National Stock Exchange and the Bombay Stock Exchange in India. Models (1) and (2) include 211 IPOs traded for the first time between January 1, 2004 and August 30, 2007, whereas Models (3) and (4) include 197 IPOs and 187 IPOs, respectively, filed with the Securities and Exchange Board of India between January 1, 2004 and August 30, 2007. The variables shown in the table are defined in Table A.1., Appendix A. Heteroskedasticity consistent robust standard errors, clustered by year and industry, are shown in parentheses. ***, ** and * indicate significance levels of 1%, 5% and 10%, respectively, using the two-tailed test.

37

Table 4. Book-building IPOs and fixed-price IPOs with firm-commitment in India (2004–2007)

Dependent variable: IPO underpricing Intercept

Model (1)

Model (2)

Model (3)

Model (4)

2.64*** (0.761) -0.08* (0.049)

2.17*** (0.769)

-1.66*** (0.357) -1.26*** (0.375) 0.93** (0.391) 3.01*** (0.672)

-1.63*** (0.377) -1.30*** (0.379) 0.99** (0.395) 2.75*** (0.623)

3.14*** (1.405) -0.12* (0.065) 0.01 (0.0383) 0.10 (0.117) 0.21* (0.110) -0.03 (0.116) 0.09 (0.233) -0.33 (0.352) 1.12 (1.345) -1.65*** (0.376) -1.36*** (0.403) 0.98** (0.429) 3.07*** (0.899)

Industry fixed effect Year fixed effect Adjusted R2

Yes Yes 0.42

Yes Yes 0.41

Yes Yes 0.46

3.12*** (0.987) -0.13* (0.076) 0.01 (0.043) 0.12 (0.127) 0.19 (0.115) -0.01 (0.131) 0.08 (0.246) -0.24 (0.369) 1.64 (1.496) -1.64*** (0.391) -1.35*** (0.416) 0.97** (0.451) 3.19*** (1.030) 0.01 (0.001) 0.01 (0.002) -0.01 (0.001) Yes Yes 0.44

Observations

166

166

158

152

Ln (IPO shares) Ln (Firm size)

-0.04 (0.037)

Underwriter rep dummy Auditor rep dummy VC back dummy Group affiliation dummy Hot IPO market Market return Book-building dummy Post 2005 dummy Book-building × Post 2005 dummy Book-building price revision EBIT to TA Leverage MTB

Table 4 reports the regression results for book-building IPOs and fixed-price IPOs underwritten with firm-commitment contracts on the National Stock Exchange and the Bombay Stock Exchange in India. Models (1) and (2) include 166 IPOs (154 book-building and twelve fixed-price) traded for the first time between January 1, 2004 and August 30, 2007, whereas Model (3) and Model (4) include 158 IPOs and 152 IPOs, respectively, filed with the Securities and Exchange Board of India between January 1, 2004 and August 30, 2007. The variables are defined in Table A.1., Appendix A. Heteroskedasticity consistent standard errors, clustered by year and industry, are shown in parentheses. ***, ** and * indicate significance levels of 1%, 5% and 10%, respectively, using the two-tailed test.

38

Table 5. Fixed-price IPOs with firm-commitment and best-efforts (2004–2007)

Dependent variable: IPO underpricing Intercept Ln (IPO shares)

Model (1)

Model (2)

Model (3)

Model (4)

0.74 (6.417) -0.04 (0.414)

3.28 (3.099)

8.40 (6.552) -0.55 (0.417)

5.98 (22.026) 0.01 (1.352) -0.32 (0.626) -1.39 (1.263) -0.51 (1.970)

Ln (Firm size)

-0.14 (0.164)

Underwriter rep dummy

1.66*** (0.366) -0.19 (0.463) -0.95** (0.445)

1.56*** (0.278) -0.57* (0.310) -0.81** (0.331)

-1.39 (0.958) -0.73 (0.452) 0.30 (0.358) 0.38 (1.090) -3.45 (6.425) 1.33*** (0.347) -0.23 (0.372) -0.74* (0.412)

Industry fixed effect Year fixed effect

Yes Yes

Yes Yes

Yes Yes

Yes Yes

Adjusted R2

0.19

0.31

0.42

0.53

Observations

54

54

47

44

VC back dummy Group affiliation dummy Hot IPO market Market return Firm-commitment dummy Post 2005 dummy Firm-commitment × Post 2005 dummy EBIT to TA Leverage

0.65 (2.383) -12.64 (15.467) 1.60** (0.747) -0.02 (1.702) -1.12* (0.628) 0.03 (0.097) -0.01 (0.018)

Models (1) and (2) in Table 5 report the regression results for 54 fixed-price IPOs of which twelve are underwritten with firm-commitment contracts and 42 are underwritten with best-efforts contracts that traded for the first time on the National Stock Exchange and the Bombay Stock Exchange in India between January 1, 2004 and August 30, 2007. Models (3) and (4) report the regression results for 47 fixed-price IPOs and 44 fixed-price IPOs, respectively, that were filed with the Securities and Exchange Board of India between January 1, 2004 and August 30, 2007. The dependent variable IPO underpricing stands for the return on the first day of trading as defined in Table A.1., Appendix A, along with other variables shown in the table. For each variable, we present the estimated regression coefficient with its standard deviation below the coefficient in parentheses. We control for heteroskedasticity using robust standard errors, clustered by year and industry. ***, ** and * indicate significance levels of 1%, 5% and 10%, respectively, using the two-tailed test.

39

Table 6. Difference-in-differences (DiD) analysis of IPO underpricing in book-building IPOs underwritten with firm-commitment contracts and fixed-price IPOs underwritten with firm-commitment contracts in India (2004–2007) Panel A: Covariates

Ln (IPO shares) Ln (Firms size) Underwriter rep dummy Auditor rep dummy VC back dummy Group affiliation dummy Hot IPO market Market return

Coefficient

Std. Error

t-statistic

p-value

-0.09 -0.01 0.05 0.25** -0.04 0.07 -0.09 1.37

0.065 0.039 0.126 0.105 0.109 0.223 0.345 1.373

-1.408 -0.025 0.407 2.397 -0.390 0.302 -0.278 1.002

0.163 0.980 0.685 0.019 0.697 0.763 0.782 0.320

Industry fixed effect Year fixed effect

Yes Yes

Adjusted R2 Observations

0.38 158

Panel B: Outcome variable: IPO underpricing Base Line (BL): Pre-regulatory act (2004-2005)

IPO underpricing

Fixed-price

Book-building

2.81

1.34

Diff (BL) -1.47*** (0.373)

Follow up (FU): Post-regulatory act (2005-2007) Fixed-price

Book building

Diff (FU)

DiD

1.37

0.90

-0.47* (0.245)

1.00** (0.433)

Table 6 reports the difference-in-differences (DiD) estimation results for 147 book-building IPOs and eleven fixed-price IPOs underwritten with firm-commitment contracts filed with the Securities and Exchange Board of India between January 1, 2004, and August 30, 2007. The IPOs are listed on the National Stock Exchange and the Bombay Stock Exchange in India (01/01/2004-08/30/2007). The outcome (dependent variable) IPO underpricing stands for the first-day return as defined in Table A.1., Appendix A. The treated variable is the book-building IPO, and the control variable is the fixed-price IPO. The coefficients for the covariates along with their t-statistics and p-values appear in Panel A. The DiD in Panel B is estimated using OLS regression, with respect to the discretionary allocation period (baseline period: 01/2004-09/2005) and the non-discretionary allocation period (follow-up period: 09/2005-08/2007). The standard errors (in parentheses) are clustered by year and industry. ***, ** and * indicate significance levels of 1%, 5% and 10%, respectively, using the two-tailed test.

40

Table 7. Difference-in-differences analysis of IPO underpricing in fixed-price IPOs underwritten with firm-commitment and best-efforts contracts in India (2004–2007) Panel A: Covariates Coefficient

Std. Error

t-statistic

p-value

Ln (IPO shares) Underwriter rep dummy VC back dummy Group affiliation dummy Hot IPO market Market return

-0.56 -1.39 -0.73 -0.84 0.38 -3.45

0.417 0.959 0.452 0.659 1.091 6.426

-1.338 -1.452 -0.455 -1.619 0.349 -0.537

0.189 0.155 0.652 0.114 0.729 0.594

Industry fixed effect Year fixed effect

Yes Yes

Adjusted R2 Observations

0.42 47

Panel B: Outcome variable: IPO underpricing Base Line (BL): Pre-regulatory act (2004-2005)

IPO underpricing

Best-efforts

Firm-commitment

12.20

13.54

Diff (BL) 1.34*** (0.348)

Follow up (FU): Post-regulatory act (2005-2007) Best-efforts

Firm-commitment

Diff (FU)

DiD

11.97

12.57

0.60 (0.384)

-0.74* (0.412)

Table 7 reports the difference-in-differences (DiD) estimation results for 47 fixed-price IPOs listed on the National Stock Exchange and the Bombay Stock Exchange in India (2004-2007). The outcome (dependent variable) IPO underpricing stands for the first-day return as defined in Table A.1., Appendix A. The treated variable is the firm-commitment IPO, and the control variable is the Best-efforts IPO. The coefficients for the covariates along with their t-statistics and pvalues appear in Panel A. The DiD is estimated using OLS regressions, with respect to the discretionary allocation period (baseline period: 2004-2005) and the non-discretionary allocation period (follow-up period: 2005-2007). The standard errors are clustered by year and industry. ***, ** and * indicate significance levels of 1%, 5% and 10%, respectively, using the two-tailed test.

41

Table 8. Propensity score matching (PSM) analysis of IPO underpricing in book-building IPOs and fixed-price IPOs with firm-commitment contracts in India (2004–2007) Panel A: Pre-September 2005 IPOs (IPOs underwritten with firm-commitment contracts) Treated IPOs = book-building with firm-commitment; Control IPOs = fixed-price with firm-commitment Probit mode: Book-building dummy Ln (IPO shares) Common support Balancing property satisfied Pseudo R2 Observations

Coefficient

Std. error

z-statistic

1.40

1.005

1.40

Matching mode: IPO underpricing Pre-match

Treated (book-building)

Control (fixed-price)

Difference

0.43

1.91

0.59

2.21

-1.48*** (0.317) -1.62* (0.890)

Post-match (nearest neighbor)

Yes Yes 0.25 56

Panel B: Post-September 2005 IPOs (IPOs underwritten with firm-commitment contracts) Treated IPOs = book-building with firm-commitment; Control IPOs = fixed-price with firm-commitment Probit mode: Book-building dummy Ln (IPO shares) Common support Balancing property satisfied Pseudo R2 Observations

Coefficient

Std. error

z-statistic

-0.05

0.163

-0.30

Matching mode: IPO underpricing Pre-match

Treated (book-building)

Control (fixed-price)

Difference

0.22

0.55

0.21

0.56

-0.33** (0.148) -0.35 (0.277)

Post-match (nearest neighbor)

Yes Yes 0.01 110

Table 8 reports the PSM estimation results for book-building IPOs and fixed price IPOs, with firm-commitment underwriting contracts in the 2004-2005 period (Panel A) and the 2005-2007 period (Panel B) in India. In the first stage, we estimate the propensity score for each IPO using the predicted probabilities from a Probit model and match each treated IPO to a control IPO by the number of shares issued using the nearest neighbor matching with 0.05 caliper (maximum distance of controls). In the second stage, we minimize the propensity score distance between the matched control IPOs and treated IPOs to examine IPO underpricing differences using the average treatment effect on the treated IPOs (ATT) with t-statistic; ***, ** and * indicate significance levels of 1%, 5% and 10%, respectively, using the z-test (Probit regressions) and the t-test (Matching regressions).

42

Table 9. Propensity score matching (PSM) analysis of IPO underpricing fixed-price IPOs with firmcommitment contracts and best-efforts contracts in India (2004–2007) Panel A: Pre-September 2005 IPOs (fixed-price IPOs) Treated IPOs = underwritten with firm-commitment; Control IPOs = underwritten with best-efforts Probit mode: Firm-commitment dummy Ln (IPO shares) Common support Balancing property satisfied Pseudo R2 Observations Matching mode: IPO underpricing Pre-match Post-match (nearest neighbor)

Coefficient

Std. error

z-statistic

-0.87

0.739

-1.18

Treated (firm-commitment)

Control (best-efforts)

Difference

1.91

0.47

1.91

1.05

-1.44*** (0.417) 0.86 (0.794)

Yes Yes 0.10 24

Panel B: Post-September 2005 IPOs (fixed-price IPOs) Treated IPOs = underwritten with firm-commitment; Control IPOs = underwritten with best-efforts Probit mode: Firm-commitment dummy Ln (IPO shares) Common support Balancing property satisfied Pseudo R2 Observations Matching mode: IPO underpricing Pre-match Post-match (nearest neighbor)

Coefficient

Std. error

z-statistic

0.70

0.431

1.64

Treated (firm-commitment)

Control (best-efforts)

Difference

0.55

0.16

0.46

-0.12

0.39** (0.177) 0.58** (0.238)

Yes Yes 0.08 30

Table 9 reports the PSM estimation results for fixed price IPOs with firm-commitment underwriting contracts and with best-efforts underwriting contracts in the 2004-2005 period (Panel A) and the 2005-2007 period (Panel B) in India. In the first stage, we estimate the propensity score for each IPO using the predicted probabilities from a Probit model and match each treated IPO to a control IPO by the number of shares in the IPO using the nearest neighbor matching with 0.05 caliper (maximum distance of controls). In the second stage, we minimize the propensity score distance between the matched control IPOs and treated IPOs to examine IPO underpricing differences using the average treatment effect on the treated IPOs with t-statistic; ***, ** and * indicate significance levels of 1%, 5% and 10%, respectively, using the ztest (Probit regressions) and the t-test (Matching regressions).

43

Appendix A____________________________________________________________________

Book-building dummy

Takes a value of 1 for book-building IPOs, and 0 for fixed-price IPOs.

Firm-commitment dummy

Takes a value of 1 for IPOs underwritten with firm-commitment contracts, and 0 for IPOs underwritten with best-efforts contracts.

IPO offer price

IPO share price (Indian Rupees).

IPO shares

Number of IPO shares in an issue.

Firm size

IPO offer price × total number of post-IPO shares in the firm.

IPO underpricing

(Closing price on the first day of trading – IPO offer price)/IPO offer price, namely, first-day return.

Book-building price revision

Percentage deviation between the IPO offer price and the mid-point of filing price range.

Post 2005 dummy

Takes a value of 1 for IPOs listed between September 2005 and August 2007, and 0 for IPOs listed between January 2004 and September 2005.

Hot IPO market

Average first-day returns of IPOs in the three months preceding the month in which the respected IPO is traded.

Market return

Monthly average returns of the BSE (SENSEX index) in the three months preceding the month in which the respected IPO is traded.

VC back dummy

Takes a value of 1 for IPOs back by a Venture Capital firm, and 0 otherwise. Source: SDC Platinum Database.

Auditor rep dummy

Takes a value of 1 if the auditor(s) of the IPO is one of the ―Big 4‖ Accounting and Auditing firms in India —Deloitte, Ernst and Young, PWC, KPMG, and 0 otherwise.

Underwriter rep dummy

Takes a value of 1 if the underwriter of the IPO is in the top quartile — underwriter with the most deals and the highest proceeds in the January 2004 and August 2007 period, and 0 otherwise.

Group affiliation dummy

Takes a value of 1 for IPOs backed by a business group, such that there are at least 3 firms in a group, following Gopalan et al. (2007) and Khanna and Palepu (2000). Source: SDC Platinum Database.

44

Earnings ratio – EBIT to TA (%)

Earnings before interest and taxes divided by total assets for the financial year when the IPO firm is listed, in percentage. Source: WRDS-COMPUSTAT Global.

Debt to TA ratio – Leverage (%)

The sum of short-term and long-term debt divided by the total assets for the financial year when the IPO firm is listed, in percentage. Source: WRDS-COMPUSTAT Global. Market value of equity divided by the book value of equity at the time of the IPO firm listing. Source: WRDS-COMPUSTAT Global.

Market to book – MTB

Table A.1.

A list of variable definitions used in the analysis

Variable

N

Mean

Std. Dev.

5%

Quartile 1

Median

Quartile 3

95 %

IPO and underwriting mechanism Book-building dummy 211

0.74

0.44

-

-

1.00

-

-

Firm-commitment dummy

211

0.79

0.41

-

-

1.00

-

-

Market conditions Hot IPO market (%)

211

33.88

18.80

9.86

18.90

34.51

40.70

68.83

Market return (%)

211

3.31

3.25

-3.59

1.49

4.11

5.71

7.52

Certification VC back dummy

205

0.16

0.37

-

-

0.00

-

-

Auditor rep dummy

205

0.16

0.37

-

-

0.00

-

-

Underwriter rep dummy

205

0.09

0.29

-

-

0.00

-

-

Group affiliation dummy

197

0.94

0.23

-

-

1.00

-

-

Firm specific variables IPO underpricing (%)

211

32.69

52.32

-22.50

-2.33

18.56

51.85

143.41

IPO shares (million )

211

27.10

82.98

2.90

4.05

6.96

12.75

113.11

Ln (IPO shares)

211

16.02

1.13

14.88

15.22

15.76

16.36

18.54

Firm size (INR million)

211

20,343.13

82,234.33

299.15

871.01

2,534.17

7,036.32

69,527.64

Ln (IPO shares)

211

21.82

1.68

19.52

20.59

21.65

22.67

24.97

Book-building price rev. (%)

157

5.02

4.80

-8.57

4.13

6.67

8.33

9.09

EBIT to TA (%)

197

10.84

41.04

0.72

8.18

12.78

17.99

31.00

Leverage (%)

197

31.83

19.34

0.23

18.96

33.94

44.09

62.55

MTB

197

6.83

18.55

0.41

1.46

3.38

6.57

24.12

Table A.2. Descriptive statistics The table presents descriptive statistics for the variables used in the analysis

45

Appendix B

Table A.

IPO underpricing under discretionary Allocation Book-building IPO

With Firmcommitment

With bestefforts

Table B.

Fixed-priced IPO

Low - Medium

High

Low

Medium-High

IPO underpricing under investor protection Book-building IPO

With Firmcommitment

With bestefforts

Medium

Low – Medium

Fixed-priced IPO

Medium – High

Medium

Figure 1. IPO underpricing in equity markets in which institutional investors’ information reporting benefits exceed investor protection benefits

Table A.

IPO underpricing under discretionary Allocation Book-building IPO

With Firmcommitment

With bestefforts

Table B.

Fixed-priced IPO

High

High

Medium

Medium

With Firmcommitment

With bestefforts

IPO underpricing under investor protection Book-building IPO

Fixed-priced IPO

Medium

Medium

Low

Low

Figure 2. IPO underpricing in equity markets in which investor protection benefits exceed institutional investors’ information reporting benefits

46