Disclosed qualitative factors and underpricing: an empirical evidence from Indian IPO market

Abstract

Purpose The academic research into underpricing of initial public offerings (IPOs) offers many explanations, i.e. signalling, financial and market hypothesis. However, another set of information, namely, “Qualitative Factors” (along with financial and others), are largely reported by the issuing firms in the prospectus. However, to the best of the authors’ knowledge no such systematic study has been carried out on how firms’ qualitative factors impact the IPO valuation. This paper aims to addresses this gap. Design/methodology/approach Using a sample of 82 IPOs issued from 2014 to 2020, we investigate the issuing firm’s pattern of reporting qualitative factors. These qualitative factors are subjected to factor analysis. The authors classify all reported factors across firms into a few categories using principal component analysis. The authors also investigate the impact of these factors on IPO underpricing using OLS regression. Findings The authors find that the qualitative information relating to market leadership, established brand image and modern scalable information technology infrastructure significantly influences underpricing. The authors also document that market leadership and brand image are the influential reported quality factors that reduce underpricing. Moreover, location advantage, good customer relationship, established relationship with a client, track record of growth and profitability, experienced promoter and management team failed to influence underpricing. Originality/value The outcome of this piece of research offers additional signalling as an attestation of quality for the issue. The authors further argue that the amount of qualitative information disclosed by the managers in the prospectus to support the pricing should not be ignored.