Long-run Stock Return of IPO Firms in India: Examining Investment and Profitability Hypothesis

Abstract

The finance literature has analysed several aspects of the IPO market, namely, hot issue market, initial under-pricing, and long-run underperformance. Among them, findings of long-run underperformance are particularly significant as it indicates that investors incur losses on a perpetual basis by investing in a portfolio of IPO firms. According to the OECD (2019), during 2009–2019, the number of IPO issuances by non-financial firms in India were the third-highest globally. In the case of India, only a few studies have investigated the long-run performance of IPO firms. Accordingly, the present study fills a void in this arena. The study, along with the conventional event study techniques, deploys the Fama-French Five-Factor model for analysis of long-run underperformance. The study estimates investment and profitbility factors for India following the methodology illustrated by Fama-French (2015). The study finds that long-run underperformance by the IPO firms is not absolute but specific to the sample and methodology used for analysis. It also finds that underperformance is prevalent in high IPO volume years. The regression results for IPO firms as portfolios in the capital asset pricing framework do not show any long-run underperformance. This finding supports the conclusion that the long-run underperformance by IPOs reported in the previous studies results suffers from sample and methodology bias. The analyses in the five-factor framework show the plausibility of higher investment by IPO firms resulting in lower market return. IPO firms make above-industry-average capital expenditure, and their profitability converges with the industry after issue.