Does Regulation Impact the Initial Returns of Initial Public Offerings? Evidence from Indian Capital Market

Abstract

Regulations are put in place in the capital markets to protect the interests of investors while promoting companies to actively participate in the capital markets. This multidisciplinary study concentrates on analysing the impact of one such regulation, based on entry norms, on the initial returns of book-built IPOs in the presence of firm-related and issue-related control variables, thereby facilitating decision-making to issuers and investors. Using various parametric and non-parametric tests on 259 IPOs issued on Indian Stock Exchanges during financial year 2009–2010 to 2019–2020, it can be concluded that Indian IPOs are underpriced on an average, irrespective of the entry norm followed. Further, firms entering through either of the entry routes, that is, profitability route or Qualified Institutional Buyer Route have significant differences in age, listing delay, type of sale, rank of lead managers and industry. Entry norm is established to have a negative yet insignificant role in determining the initial returns, while oversubscription is the only variable with a positive and significant impact on the initial returns of the issue. JEL Codes: G10, G14, G18, G23, K22