Article

Vision
20(3) 237–248
Analyzing Long-run Performance of © 2016 MDI
SAGE Publications

Select Initial Public Offerings Using sagepub.in/home.nav

DOI: 10.1177/0972262916652809

Monthly Returns: Evidence from India http://vision.sagepub.com

Gautam Das1
Malayendu Saha2
Abhijit Kundu3

Abstract
The anomalies in respect to initial public offering (IPO) performance in literature have stimulated multitude of research works in
explaining critical issues, such as under-pricing during short-run and underperformance phenomena in the long run as is observed
globally. This study endeavours to look into the long-run performance of select Indian IPOs using monthly returns following event
study methodologies. Besides parametric tests, it has also applied wealth relative as a measure of performance of those IPOs. The
article documents positive long-run average abnormal returns for Indian IPOs, unlike other countries. However, statistically we fail
to reject the null hypothesis of zero abnormal return and therefore conclude existence of no significant long-run underperformance
or over-performance in the Indian IPO stocks. In exploring the possible factors which may have bearing in determining the long-
run performance of the IPOs, it is observed that book-to-market value (BMV) ratio, age of the IPO firm and aftermarket corporate
measures, such as bonus issue and stock split, have significant predictive power in explaining the long-run performance.

Key Words
Underperformance, Market Efficiency, CAR, BHAR, Wealth Relatives

Introduction underwriters’ reputation, ownership structure and bad luck

Researchers have mixed observations on the long-run
performance of the initial public offerings (IPOs) in diffe-
rent countries of the globe. Levis (1993) and Espenlaub,
Gregory and Tonks (1998) documented the existence of
long-run overpricing with limited explanations for the
existence of this phenomenon in UK. Aggarwal and Rivoli
(1990), Ritter (1991) and Loughran and Ritter (1995, 2000)
also observed the same in US IPOs. Study of IPOs in
Australia, on the other, provides further evidence on the
poor long-run performance (Lee, Taylor & Walter, 1996).
According to Hwang and Jayaraman (1992) and Kim,
Krinsky and Lee (1995), performance of IPO stocks in
Japan, Korea, Spain and Malaysia is better than, or equal
to, non-IPO stocks in the 2–3-year post-issue period.
Factors identified in respect to non-performance include
(Brav et al, 2000; Carter, Frederick & Singh, 1998; Jain &
Kini, 1994; Michaely & Shaw, 1994). Other financial
researchers have observed that the IPOs performance is
generally under-priced in the short run, though some issues
tend to be overpriced. According to them, IPO under-
pricing has been found in nearly every country in the
world. While there is a consensus that average initial
under-pricing does exist in the IPO market, the aftermarket
performance provides contradictory findings. An article by
Ibbotson (1975) reported a negative relation between initial
return and long-run share performance of IPO in the USA.
To evaluate the long-run performance of IPO, the stand-
ard literature and theory excessively rely on event study
methodology, it receives its theoretical impetus from the
efficient market hypothesis (EMH) as espoused and intro-
duced by Fama, Fisher, Jensen and Roll (1969), to produce

1 Assistant Professor, Department of Commerce, Budge Budge College, Kolkata, West Bengal, India.
2 Professor, Department of Commerce, University of Calcutta, Kolkata, West Bengal, India.
3 Assistant Professor, Barrackpore Rashtraguru Surendranath College, Kolkata, West Bengal, India.

Corresponding author:
Gautam Das, 6/6, Gour Sundar Seth Lane, Kolkata, West Bengal, India.
E-mail: gautamdas79@gmail.com
238
useful evidence on response of stock prices to information.
According to Kothari and Warner (2005), event studies
serve an important purpose in capital market-related
research as the principle means of testing market effi-
ciency. According to them, ‘systematically non-zero abnor-
mal security returns that persist after a particular type of
corporate event are inconsistent with market efficiency’.
Keeping this in the backdrop, theoretical backbone of the
present study is also the semi-strong form of EMH simply
because we have made use of the information that is avail-
able in the public domain. However, while measuring the
performance of any investment, one has to keep in mind
two dichotomous aspects associated to every investment:
(i) the return generated and (ii) the risks associated in the
process. Hence, the evaluation in respect to the perfor-
mance of equity issue, especially for IPO issue, is called a
risk-adjusted measure which refers to adjusted raw return
of the selected companies and the corresponding bench-
mark return to proxy the market return. Likewise, two most
promising evaluation methods of event study are employed
here in capturing the long-run IPO price performance by
calculating monthly abnormal returns after adjusting for
important corporate actions, such as payment of dividend,
stock split and bonus issue into consideration, and ascer-
taining thereby the cumulative abnormal returns. In addi-
tion, the study also attempts to employ wealth relatives
being adjusted with Nifty 500.
For long-run price performance, the literature is virtually
divided into two most well-known abnormal return models:
(i) cumulative abnormal return (CAR) and (ii) buy-and-
hold abnormal return (BHAR). There has been significant
debate on whether researchers should use CAR or BHAR
method of calculating abnormal returns when conducting
event studies. Lyon, Barber and Tasi (1999) documented
that when the research question is whether or not investors
earn abnormal stock return over a particular time horizon,
BHAR model should be used to answer this question.
The CAR approach, on the other hand, is to be employed to
answer questions such as whether sample firms persis-
tently earn abnormal return. Mitchell and Stafford (2000)
strongly emphasize that BHAR method has poor statistical
properties and often produces biased statistics in random
samples. They raise an important observation regarding the
long-term abnormal return subsequent to major corporate
events. According to them, the long-run event studies can
possibly help in identifying systematic mispricing of secu-
rities up to 5 years following major corporate decisions.
These findings strongly negate the notion of stock market
efficiency. Kothari and Warner (2005) and Ritter (1991)
appreciate the use of both the CAR and BHAR method for
calculating the excess return under market-adjusted return
method. However, Fama (1998) is a strong supporter of
CAR approach over BHAR simply because of the latter’s
poor statistical properties in explaining the long-horizon
performance. The advantage of using the former is that the
terminal value of investing in both the IPOs and the
Vision 20(3)
benchmark was compared (Bessler & Thies, 2007). Barber
and Lyon (1997), Kothari and Warner (1997) and many
otherprominentresearchershavealsousedtheBHARmethodo-
logy over CAR method. On the contrary, Fama (1998),
Mitchell and Stafford (2000) and others have favoured the
use of CAR method over BHAR method to analyze the
long-run performance of IPOs. Ritter (1991) has argued
that both the CARs and BHARs should be used to answer
different questions. Following Ritter (1991), we have used
both the methodologies in our study.
The existing literature on event study format warranted
that we need to ascertain the abnormal or excess return first.
There are many ways to calculate the excess return such as
(i) mean-adjusted return model, (ii) market-adjusted return
model, (iii) market model or ordinary least square (OLS)
market model, (iv) capital asset pricing model (CAPM)-
based abnormal return model and (v) Fama–French multi-
factor model. The market-adjusted return model popularly
referred to as the market-adjusted excess return (MAER)
model is a simple and intuitive model (Brown & Warner,
1985; Kothari & Warner, 1997) based on the abnormal
return. Brown and Warner (1980) in their study have
concluded that ‘a simple methodology based on the market
model is both well specified and relatively powerful under
a wide variety of conditions’. The problem with the market
model especially in case of IPO is very acute since the
IPOs do not have any information on earlier prices; the
OLS parameters (a and b) are usually difficult to estimate
for security over the pre-event window. For this reason,
some studies have not considered the pre-event window,
rather they compute market model parameters from the
post-event window. This has been done by Sapusek (2000)
in his study.
There has been prolonging debate on the issue of what
return (daily or monthly) should be considered, especially
for long-run performance analysis. Brown and Warner
(1985) concluded that individual security returns suffer
from certain limitations and are likely to be less normal.
The daily stock return for an individual security exhibits
substantial departure from normality that is not observed
with monthly data. In addition, the estimation of parame-
ters from daily data is complicated by non-synchronous
trading, a complication identified by Scholes and Williams
(1997) as ‘especially severe’.
In the Indian context, very few studies have been con-
ducted for long-run performance analysis and most of them
have taken a 3-year period after listing. Shah (1995) has
documented a phenomenal excess return over the offer
price, while Madhusoodanan and Thiripalraju (1997) in
their study on IPOs listed in Bombay Stock Exchange
during 1992–1995, showed that IPOs in the long run
yielded higher returns compared to the negative returns
recorded in its global counterparts. Sahoo and Rajib (2010)
in their study during 2002–2006 reported that on an
average, Indian IPOs are under-priced and long-run under-
performance has also been reported. Based on the above
discussions, the study has identified the following
Das et al. 239
objectives: (i) to evaluate the long-run performance of
those IPOs using various event study methodologies as
well as wealth relatives and (ii) to identify the probable
factors for explaining the long-run performance of the
Indian IPO stocks.
Research Methodology
Literature on IPO emphasizes on calculating returns as the
basis of performance study. There are numerous methods
advocated by the researchers on how returns should be
calculated. To be consistent with literature, the study has
employed the methodology coined by Aggarwal, Leal and
Hernandez (1993) for measuring return. Following this,
monthly return for stock ‘i’ is calculated as:
Pi1
R it = - 1(1)
Pio
where Rit denotes monthly return for stock ‘i’, Pi1 is the
closing share price of the stock ‘i’ at the end of a month and
Pio is the closing price of the previous month. The corre-
sponding monthly return for the market index is similarly
calculated as follows.
Pm1
R mt = - 1(2)
Pmo
where Rmt is the monthly return for the market benchmark,
Pm1 is the closing value of the market index at the end of a
month and Rmo is closing value of the market index of the
previous month. While calculating the monthly returns for
long-run performance of IPO, we have excluded the listing
day return as has been done by Ritter (1991) in order to
find the long-run performance sans any abnormal initial
listing gain.
Market-adjusted Excess
Return Model
The model defines abnormal returns as the excess or
surplus return on a security, adjusted for the return on the
Nifty 500 index over the same period of time. The MAER
model has become the obvious choice because of its sim-
plicity in implementation and interpretation. The equation
for the MAER is:
MAER it = R it - R mt (3)
where MAERit is the market-adjusted excess return on secu-
rity i over time t; Rit is return adjusted for dividend and other
corporate actions, such as bonus and stock split, on security
‘i’ during month ‘t’; and Rmt is return on Nifty 500 index
during month ‘t’, which is used as proxy for market return.
Market Model Abnormal
Return Model
The other model we have used to analyze the post-event
monthly abnormal returns is based on the market model.
Following Sapusek (2000), we have estimated alpha and
beta values for the stock ‘i’ over its post-issue period so
that we can calculate the abnormal returns of the stock, that
is, the empirical deviations of the stock returns from the
returns calculated using the estimated regression coeffi-
cients. The formula for market model abnormal return
(MMAR) can be written as follows:
MMAR it = R it - a i + b i R mt 
 or
MMAR it = R it - E (R it)(4)
where Rit is the adjusted raw return of the security i during
time t and E(Rit)1 denotes expected rate of return for stock
i during period i. Conventionally, abnormal returns calcu-
lated with the above two models (MAER and MMAR) are
operationalized using the following methods.
Cumulative Abnormal
Return Method
Ascertainment of abnormal returns is central for measuring
long-run aftermarket performance. The study has incorpo-
rated the abnormal return following MAER and MMAR
models in order to estimate security-specific abnormal
returns. Using the monthly returns following both the
equations (3) and (4), we calculate the average abnormal
return (AAR) as follows:
1
AAR t = n | ni = 1 AR it (5)
The cumulative average abnormal return (CAAR), that is,
aftermarket performance from event month q to event
month s, is the summation of the average benchmark-
adjusted abnormal return.
CAR q, s = | st = q AAR t (6)
Fama (1998) justifies the use of CAR method for its statis-
tical properties. Ritter (1991) has also used this methodo-
logy, and in fact. it is the most popular method in the
literature.
Buy-and-hold Abnormal
Return Method
Since we are employing two abnormal return models
with and without adjusting for market coefficient, that is,
beta and alpha, we have two different sets of BHARs.
240 Vision 20(3)

1
1+
60
| 60t = 1 R it
WR i = (9)
1
1 + | 60 R mt
60 t =1

where WRi is the wealth relative of the company i over

a 5-year period. Rit and Rmt are calculated using equations
(1) and (2), respectively. The above formula of wealth rela-
tive is based on simple return as has been employed by
Levis (1993).
Figure 1. Long-run IPO Performance Methodology Based on Alternatively, wealth relative can also be calculated
Event Study (using monthly return) using holding period return (HPR). Ritter (1991) used this
Source: Authors’ own.
HPR, defined as % 60
t =1
(1 + R it). Similarly, return on market
is defined as % 60
t =1
(1 + R mt). The formula employed for
Subsequently, BHAR equation using MAER model for measuring wealth relative using HPR is given below:
measuring long-run performance is given below.
1
1+ % 60 R
60 t = 1 it
BHAR it = % tT= 0 [1 + R it] - % Tt = 0 [1 + (R mt)](7)
    WR it =
1
(10)
1 + % 60 R mt
60 t = 1
where Rit and Rmt are calculated using equations (1) and (2),
respectively. where WRit is the wealth relative of the company i for
Following Barber and Lyon (1997), we have computed period t. Rit and Rmt are calculated using equations (1) and
the BHAR using the market model parameter alpha and (2), respectively.
beta and named it as MMAR BHAR. The following
formula is used for evaluating long-run performance of
select IPOs. Testing of Various Abnormal
Return Models and Their
  BHAR it = % tT= 0 [1 + R it] - % Tt = 0 [1 + E (R it)](8) Statistical Significance
Before we proceed to frame our hypotheses, we must throw
where Rit and Rmt are calculated using equations (1) and (4), some light on the test statistic that we wish to employ in
respectively. our study. The test statistic employed in our study is one
The following diagram (Figure 1) will give an insight of sample Student’s t-test. We framed the following null and
the methods used in the study for measuring long-run alternative hypotheses using CAR for both the MAER and
performance of the Indian IPOs using adjusted monthly MMAR models to test the statistical significance, if any,
returns. of the long-run aftermarket price performance of the
Indian IPOs.

Methods of Wealth Relative H0 : There exists no abnormal return in the long run,
The performance of IPOs can also be evaluated by using that is, CAR(q,s) = 0.
the concept of wealth relative as has been done by Levis H1 : There exists abnormal return in the long run, that
is, CAR (q,s) ≠ 0.
(1993) and can be measured at different time intervals.
Generally, a wealth relative of greater than one indicates
To test the hypotheses, we compute the associated t-
better performance of an IPO over the market index, while
statistic as follows:
the wealth relative less than one indicates underper-
formance. We have used the method to ascertain the long- CAR
run performance of IPOs in India. Wealth relative can be t=  (11)
S (CAR) (q, s)
calculated using simple average return during 60 months
:n
and corresponding 60-month average benchmark (market)
return. Following is the formula for wealth relative using where S is the cross-sectional standard deviation of CAR(q,s)
simple average return. across companies.
Similarly, to test the BHAR using both the MAER and
1 + average 5 - year return on IPOs
WR it = MMAR models, following null and alternative hypotheses
1 + average 5 - year return on market (index) have been constructed:
Das et al. 241

H0 : There exists no abnormal return in the long run,
that is, BHAR = 0.
H1 : There exists abnormal return in the long run, that
is, BHAR ≠ 0.
To test the hypotheses, we compute the associated
t-statistic as follows:
BHAR
t=  (12)
S (BHAR i, t)
:n
Data and Study Period
This study examines the long-run price performance (from 1
to 5 years) of selected Indian companies which went public
for the first time in the primary market for raising their
corpus during the study period of 1999–2007. The study
analyzes post-IPO performance over the 5-year period up to
2012. The reason for opting the year 1999 is important
because it was from this very year a new mechanism for
pricing of new issue called book building was introduced.
Selection of Sample IPO Companies
Total number of companies gone through IPO process
during 1999–2007 (including FPO and OFS)
Less: FPO and OFS (offer for sale)
Eligible companies gone through exclusive
IPO process
Less: Exclusion of IPO firms due to non-availability of
reliable secondary market data
Remaining companies 
Less: IPOs excluded on account of non-availability of
complete information relating to IPO characteristics
Companies finally available for selection
Final number of selected companies using SRSWOR 47
The CNX Nifty 500 is considered as our benchmark
index which comprises a well-diversified portfolio repre-
senting different sectors of Indian industry. It is to be noted
that to calculate the parameter of market model, the appli-
cation of broad-based stock index (such as S&P 500) is
preferred to proxy the market returns (Mackinlay, 1997).
For these reasons, we preferred CNX Nifty 500 as our bench-
mark index instead of other popular index maintained by
National Stock Exchange (NSE).
Aftermarket Performance of IPOs:
Empirical Findings
CAR Method
As per the convention, in the application of MAER model,
the abnormal return is calculated using the difference
between the return observed for individual company with
the corresponding market return. The market return here
means the return generated by Nifty 500. It is used as proxy
to mirror the market return.
It is observed from Table 1 that the CAAR is positive
but varies considerably from first year to next four years.
The concept of trimmed mean is important since in this
method of averaging it removes largest and smallest values
before calculating the mean. The 5 per cent trimmed mean
is just 4.28 per cent in the first year and in the following 2
183
years, it is negative only to revive in the fourth and fifth
(29) year with a moderate to high positive return, respectively.
We thus find that there is severe underperformance up to
154 36 months followed by over-performance during the next
24 months. Looking at the t-values and the corresponding
(18) p-values, it can, however, be inferred from the MAER
136 model that the null hypothesis of zero abnormal return
cannot be rejected in any year. This signifies that we should
(21) reject the alternative hypothesis which advocates the pres-
115 ence of significant abnormal return in the long run. Now,
we may try to explain the results obtained by employing
the MMAR model using monthly returns.
Table 2 shows that average return are positive through-
out the time period of 60 months but the standard deviation
figure is very high. The median value however portrays

Table 1. Descriptive Statistics along with t-test (using monthly CAR under MAER model)

          Return Window
Parameter 12 Months 24 Months 36 Months 48 Months 60 Months
Mean 9.57 1.59 0.67 9.20 24.99
SE of Mean 9.57 12.53 13.95 15.84 16.33
5% Trimmed Mean 4.28 –2.61 –4.01 7.82 24.46
Median –4.77 –1.58 1.81 9.60 20.22
Standard Deviation 65.39 85.95 95.65 108.64 111.97
Skewness 1.25 .824 0.88 0.265 0.00
Kurtosis 2.49 2.315 2.30 0.152 0.40
Computed t-value 1.003 0.128 0.049 0.581 1.530
p-value 0.321 0.899 0.961 0.564 0.133
Source: Authors’ own.
242 Vision 20(3)

Table 2. Descriptive Statistics along with t-test (using monthly CAR under MMAR model)

          Return Window
Parameter 12 Months 24 Months 36 Months 48 Months 60 Months
Mean 7.81 4.09 0.28 14.46 23.35
SE of Mean 8.83 10.82 12.65 14.60 15.61
5% Trimmed Mean 2.76 0.82 –1.97 13.31 23.44
Median –6.27 1.64 –9.03 15.34 16.66
Standard Deviation 60.57 74.24 86.77 100.12 107.03
Skewness 1.26 0.688 0.486 0.221 0.08
Kurtosis 2.02 1.11 0.298 –0.61 0.33
Computed t-value 0.891 0.378 0.022 0.990 1.496
p-value 0.378 0.707 0.982 0.327 0.142
Source: Authors’ own.

mostly negative values. The results depicted in the above
table 2 portray almost similar results under the MAER
model using monthly return data. Despite the positive
average abnormal return, we cannot reject the null hypoth-
esis (that long-run CAARs = 0) and thereby confirm the
presence of no significant abnormal return in the
long run.
BHAR Method
The BHAR methodology has also been receiving wide-
spread acceptance of late for measuring the long-run perfor-
mance of IPOs. To reiterate, two sets of BHAR have been
calculated in the study. First, we report the results of the
one which does not consider the market model parameters
alpha and beta; we named the model as MAER BHAR.
The method of BHAR is usually accused of serious
statistical deficiencies in its approach as can be seen from
the results reported in Table 3. It is to be noted that the
BHAR methodology has poor statistical properties than the
CAR methodology. Unlike the CAR method, BHAR
exhibits substantial positive abnormal return even in the
long run. The figure of skewness and kurtosis also exhibits
substantial departure from normality. However, if 5 per
cent trimmed mean is considered, positive return results
only in the first year and in the next 4 years it is all nega-
tive. Worse still is the result of median value which is all
negative across the 5-year evaluation period. The results
thus indicate the presence of aftermarket underperformance
over the 5-year period. However, null hypothesis advocat-
ing absence of long-run abnormal return cannot also be
refuted here under this method implying existence of no
statistically significant abnormal return in the long run.
The other methodology that we have employed to
calculate the BHAR is by using MMAR, where we have
estimated the market model parameters, alpha and beta,
to calculate the BHAR. This BHAR calculation is thus
conceptually different from the BHAR reported earlier.
The results seem almost identical with the outcomes
under the MAER BHAR method. Moreover, high p-values
(even more than 0.10) here again fail to lend statistical
support in favour of abnormal returns in any of the differ-
ent long-term return windows.
Table 4 above shows that there exist positive average
abnormal return and an incremental growth in return is also
observed which itself suggest that average long-run IPO
performance though clearly demonstrates the existence
of positive average returns, parametric statistical test fails

Table 3. Descriptive Statistics along with t-statistics for Long-run Performance (using monthly BHAR methodology under
MAER model)

          Return Window
Parameter 12 Months 24 Months 36 Months 48 Months 60 Months
Mean 27.60 39.28 39.43 18.17 69.43
SE of Mean 20.77 35.90 49.18 34.60 76.99
5% Trimmed Mean 4.33 –2.35 –11.38 –14.08 –7.64
Median –13.15 –13.17 –45.39 –56.67 –59.21
Standard Deviation 142.40 246.17 337.18 237.26 527.81
Skewness 3.39 4.52 5.72 3.07 5.80
Kurtosis 13.07 20.18 36.06 12.22 37.04
Computed t-value 1.329 1.094 0.802 0.525 0.902
p-value 0.190 0.280 0.427 0.602 0.372
Source: Authors’ own.
Das et al. 243

Table 4. Descriptive Statistics along with t-statistics (using monthly BHAR methodology under MMAR model)

          Return Window
Parameter 12 month 24 month 36 month 48 month 60 month
Mean 25.12 32.91 32.26 22.87 60.74
SE of Mean 19.90 33.41 43.24 36.88 79.9
5% Trimmed Mean 2.27 –5.00 –13.71 –5.22 –11.54
Median –13.07 –19.75 –36.68 –65.61 –49.47
Standard Deviation 136.44 229.10 296.45 252.83 548.27
Skewness 3.46 4.02 5.21 2.89 5.68
Kurtosis 13.22 18.23 30.9 12.09 36.01
Computed t-value 1.26 0.985 0.764 0.620 0.760
p-value (2-tailed) 0.213 0.330 0.459 0.538 0.451
Source: Authors’ own.

to accept the hypothesis of non-zero abnormal return and Table 6. Wealth Relative Based on Holding Period Return of
therefore reinforces the conclusion that there exists no sig- the Sample IPO Companies over 5-year Period
nificant long-run abnormal return (over-performance or
Wealth Relative (WR) WR > 1 WR = 1 WR < 1
underperformance) in the Indian IPOs. Mean long-run IPO No. of Companies 20 0 27
returns under the four alternative methods are depicted in
Source: Authors’ own.
Figure 2.

Wealth Relatives
Here, we have reported wealth relatives of the sample
firms over a period of 5 years, that is, for the time interval
of 60 months. Table 5 depicts that a sizable proportion
of companies exhibit a wealth relative higher than unity.
To be specific, as many as 55 per cent (26 companies
out of 47) companies reported positive wealth relative
greater than one indicating the superior performance
corresponding to relative benchmark index using simple
average return over a 5-year or 60-month period. While 19
companies have registered wealth relative less than unity
indicating that they are unable to beat the market during
this period, only two companies have reported to have
wealth relative equivalent to unity suggesting the perfor-
mance of these companies is at par with the benchmark.
The wealth relative picture is different when we incor-
porate HPR for computation. This model is a multiplicative
model and here, the emphasis is on buy and hold experi-
ence contrary to the earlier version where only simple
average return of the sample companies was emphasized.
Table 6, however, depicts an altogether different version.
In this model of wealth relative, only 20 companies have
been able to beat the market and the rest 27 companies fail
to do so.

Factors Influencing the Long-term

Figure 2. Average Long-run Performance of IPO Using
Monthly Return under Different Models
Source: Authors’ own.
Table 5. Wealth Relative Based on Simple Average Return of
the Sample IPO Companies over 5-year Period
Underperformance of IPOs
In order to get a possible explanation for the long-run per-
formance of the Indian IPO stocks, we have resorted to
multiple regression analysis using the same analogy fol-
lowed by Ritter (1991) and Kiyamaz (2000). Here, the
dependent variable is the 5-year monthly CAR under
MMAR model (CAR60m). Six explanatory variables have
been considered based on their theoretical explanation and
literature as follows:

Wealth Relative (WR) WR > 1 WR = 1 WR < 1 • Initial Abnormal Return (IR): This variable is used
No. of Companies 26 2 19 following the existing literature (Ibbotson, 1975;
Source: Authors’ own. Levis, 1993; Ritter, 1991) and is considered impor-
244 Vision 20(3)

Table 7. Correlation Matrix: IPO Performance and Firm Characteristics

CAR60m IR LOGAGE LOGASSET LOGISSUE BMV BONSPLIT

CAR60m 1
IR 0.009 (0.954) 1
LOGAGE –0.198 (0.181) 0.321*(0.028) 1
LOGASSET 0.113 (0.449) –0.119 (0.426) 0.042 (0.780) 1
LOGISSUE –0.134 (0.370) –0.247# (0.094) 0.022 (0.883) 0.675** (0.000) 1
BMV 0.292* (0.046) –0.243# (0.100) 0.172 (0.247) 0.523** (0.000) 0.241 (0.102) 1
BONSPLIT 0.262# (0.075) 0.004 (0.980) –0.080 (0.595) –0.011 (0.944) 0.079 (0.598) –0.163 (0.273) 1
Source: Authors’ own.
Note: (1) P-values are reported in parentheses.
(2) Values marked with #, * and ** indicate significance at the 10%, 5% and 1% level.

tant since we are interested to know whether any
relationship exists between initial return and its long-
run counterpart or not. Here, the initial listing day
return is computed using MMAR.
• Log of Issue Size (LOGISSUE): Natural logarithm
of the issue size computed by multiplying offer price
with number of shares offered through IPO is used to
incorporate the size effect (Brav et al, 2000; Fama &
French, 1993).
• BMV: The ratio is used as a proxy for expected
growth potential of the IPO firms (Brav et al., 2000;
Fama & French, 1993).
• Age (LOGAGE): Natural logarithm of one plus the
difference between the year of IPO and the year of
incorporation [Log (1+age)] is used similar to Ritter
(1991) as an extent of operational maturity of the
IPO firms.
• Log of Total Assets (LOGASSET): Natural logarithm
of total assets at the time of IPO is also considered
as a proxy for firm size following Kiyamaz (2000).
• Bonus/Split (BONSPLIT): We have used this varia-
ble to control the impact of any important corporate
action such as issue of bonus share and stock split on
the long-run IPO performance. For this, a dummy
variable taking 1 if the IPO company issues bonus
share to its existing shareholders or split the stock
during the post-IPO evaluation period and 0 other-
wise is incorporated.
The equation thus can be stated as follows:
CAR 60m = a + b 1 (IR) i + b 2 (LOGISSUE) i +
b 3 (LOGAGE) i + b 4 (BMV) i +
 
b 5 (LOGASSET) i +
b 6 (BONSPLIT) i + f i  (13)
Table 7 give us the basics of correlation matrix, we begin
with calculating the Pearson correlation coefficients to
study the strength and direction of the association between
any two variables. Looking at the correlation matrix, we do
find some significant bi-variate correlations between the
variables we considered relevant for the study.
Cross-sectional Regression Results
Table 8 reports results of the regression equation (13) with
5-year monthly CAR under MMAR model as the depend-
ent variable.
Adjusted R-squared of 0.232 indicates that all the
explanatory variables collectively explain 23.2 per cent of
the variation in the long-run IPO performance, which
seems moderate but higher than the R-squared value
(0.216) reported in Sahoo and Rajib (2010). The F-stat
with its low p-value of 0.01 indicates that there is a low
probability that the variation explained by the model is due
to chance, and hence provides sufficient evidence that the
regression equation is statistically significant to explain
variation in the dependent variable. Variance inflation
factor (VIF) value of less than 5 for each explanatory vari-
able is within the acceptable limits, whereas the Durbin–
Watson statistic is documented at 1.845 (close to the 2.0),
and hence show the absence of multicollinearity and auto-
correlation, respectively.
Unstandardized coefficient estimates of the independent
variables and their corresponding P-values reported in
Table 8 indicate that long-run IPO performance can signifi-
cantly be explained by BMV, LOGAGE and BONSPLIT
at less than 5 per cent level of significance. LOGAGE,
however, shows negative relation with the long-run perfor-
mance meaning greater the magnitude of the operational
history of an IPO firm, lower is the return and vice versa.
On the other hand, significant positive coefficient of
Das et al. 245

Table 8. Regression Results: Long-run IPO Performance and Firm Characteristics

Standardized Collinearity
Unstandardized Coefficients Coefficients Statistics
B Std Error Beta t p-value VIF
Constant (a) 270.45 134.531 2.010 0.051
IR 0.272 0.277 0.149 0.981 0.332 1.375
LOGISSUE –62.561 38.523 –0.305 –1.624 0.112 2.116
LOGAGE –58.363 28.511 –0.294 –2.047 0.047 1.239
BMV 183.25 69.668 0.445 2.630 0.012 1.711
LOGASSET 17.498 30.455 0.120 0.575 0.569 2.617
BONSPLIT 90.399 35.566 0.336 2.542 0.015 1.046
R 0.576 R-squared 0.332 Adjusted R-squared 0.232
Durbin–Watson     1.845 F-stat (p-value) 3.315 (0.010)
Source: Authors’ own.

BMV indicates that lower BMV ratio (high growth
optimism for IPO) results in long-run underperformance
consistent with the hypothesis of overoptimism and fad
story (Ritter, 1991).
Our model findings also indicate that initial return,
LOGISSUE and LOGASSET are not certainly significant
in explaining the 5-year monthly CAR. However, looking
at the positive coefficient of initial return (0.272), it can be
stated that contrary to the literature, long-run underper-
formance or over-performance dynamics of Indian IPOs
are directly related to their short-run overpricing or under-
pricing, respectively.
Conclusion
In this article, we have re-examined the aftermarket perfor-
mance of the select Indian IPOs over the period 1999–2007
using monthly returns. The study found that long-horizon
BHAR is significantly right skewed and much more pro-
nounced than that of CAR. According to the opinion of
the savants in this field, CARs help circumvent the prob-
lems of extreme skewness and kurtosis relative to BHARs
and therefore are helpful in double-checking any conclu-
sion presented by BHAR results. This finding of our study
is also consistent with the existing literature. Application
of both the techniques also provides a test of robustness
for the results, which are critical to understand the per-
formance direction as both the techniques are found to
complement each other. However, it may be concluded that
long-run price performance is difficult and perfidious as it
involves lot of underlying factors which change as the time
horizon increases. It is even more difficult because the
long-run performance is very sensitive to the choice of
methods and the benchmark employed. In this article, we
have performed the analysis using a number of alternative
approaches, but benchmarked only against S&P CNX
Nifty 500 and found positive long-run average abnormal
returns for Indian IPOs, unlike most other countries.
However, using CAR under both the MAER and MMAR
model, underperformance is pronounced only up to 36
months followed by over-performance. Unlike the CAR
method, BHAR exhibits substantial positive abnormal
return up to 24 months followed by underperformance.
Nonetheless, over the 60 months, both the approaches
result in substantial over-performance. Unlike interna-
tional experiences, the Indian markets thus show some
resilience in the long run. Moreover, we find that the long-
run performance of IPO is very sensitive to the choice of
methods and is deceitful.
However, when we use parametric statistical test, we
fail to reject the null hypothesis of zero abnormal return
and therefore conclude that there is no significant long-run
underperformance or over-performance in case of the
Indian IPOs. These results in support of zero aftermarket
performance shed some light on the informational effi-
ciency of the Indian IPO market. Our study has also
employed wealth relatives to ascertain the long-run perfor-
mance of IPOs and found that the long-run performance of
Indian IPOs is not as distressful as reported in the interna-
tional literature for other countries at least in case of wealth
relative involving simple average return.
Finally, it may well be concluded that a firm’s age,
BMV ratio, aftermarket corporate actions, such as bonus
and splits, can be used to predict the long-run performance
of the Indian IPOs. However, initial IPO return, firm size
and issue size may not work as guiding factors but long-
term IPO investors are advised to analyze overoptimistic
BMV ratio at the time of IPO cautiously.
Appendix 1
List of the Sample IPO Companies

Sl. No. Name of Company Listing Date Sl. No. Name of Company Listing Date
 1 Hughes Software 04 November 1999 25 Prithvi Information Solutions Limited 16 November 2005
 2 HCL Technologies Limited 06 January 2000 26 Bombay Rayon Fashions Limited 05 December 2005
 3 Pritish Nandy Communications Limited 11 December 2000 27 Triveni Engineering and Industries Limited 13 December 2005
 4 I-Flex Solutions Limited 28 June 2002 28 Educomp Solutions Limited 13 January 2006
 5 Divi’s Laboratories Limited 12 March 2003 29 Royal Orchid Hotels Limited 06 February 2006
 6 Maruti Udyog Limited 09 July 2003 30 Gujarat State Petronet Limited 16 February 2006
 7 Patni Computer Systems Limited 25 February 2004 31 INOX Leisure Limited 23 February 2006
 8 Petronet LNG 26 March 2004 32 GVK Power & Infrastructure Limited 27 February 2006
 9 Biocon Limited 07 April 2004 33 Gitanjali Gems Limited 10 March 2006
10 Power Trading Corporation of India 07 April 2004 34 J. K. Cement Limited 14 March 2006
11 Datamatics Technologies Limited 07 May 2004 35 NITCO Tiles Limited 21 March 2006
12 New Delhi Television Limited 19 May 2004 36 Adhunik Metaliks Limited 05 April 2006
13 Tata Consultancy Services Limited 25 August 2004 37 Kewal Kiran Clothing Limited 13 April 2006
14 IndiaBulls Financial Services Limited 24 September 2004 38 Plethico pharmaceuticals Limited 5 May 2006
15 Bharati Shipyard Limited 30 December 2004 39 Emami Limited 3 August 2006
16 Jet Airways (India) Limited 14 March 2005 40 Development Credit Bank Limited 27 October 2006
17 Jai Prakash Hydro-Power Limited 18 April 2005 41 Fiem industries 19 October 2006
18 3i Infotech Limited 22 April 2005 42 Info Edge (India) Limited 21 November 2006
19 Gokaldas Exports Limited 27 April 2005 43 Cairn India Ltd 09 January 2007
20 India Infoline Limited 17 May 2005 44 Power Finance Corporation Limited 23 February 2007
21 Shoppers Stop Limited 23 May 2005 45 SMS Pharmaceuticals Limited 28 February 2007
HT Media Limited 01 September 2005 46 MindTree Consulting Limited 07 March 2007
23 Sasken Communication Technologies Limited 09 September 2005 47 Mudra Lifestyle Limited 09 March 2007
24 Shree Renuka Sugars Limited 31 October 2005
Das et al. 247
Note
1. E(Rit) is the expected rate of return for stock i dur-
ing period t based on the market rate of return and the
stock’s relationship with the market and can be written
as ai + biRmt + fit. So to calculate the E(Rit), we have esti-
mated both the alpha and beta values of the security’s
returns and thereby calculated its expected return.
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Authors’ bio-sketch
Gautam Das (gautamdas79@gmail.com) is Assistant
Professor in Commerce at Budge Budge College near
Kolkata, West Bengal, under the University of Calcutta. He
has completed PhD in Commerce (area: financial market)
from the University of Calcutta. He has earlier done his
MPhil in Commerce from the University of Calcutta.
Currently, he is concentrating on Minor Research Project
(MRP) awarded to him from UGC. His areas of interest
include financial services, new issue market, especially the
equity issue, and cost and management accounting.
Malayendu Saha (m_saha2@rediffmail.com) is the Vice
Chairman of the West Bengal State Council of Higher
Education. In addition to that he has also been associated
with the Department of Commerce, University of Calcutta,
since 1994. He is one of the senior-most professors in the
248
Department and his areas of interest include financial
services, advanced cost and management accounting,
organizational behaviour and human resource management.
He is a keen researcher in the various areas of finance and
has published a number of research articles in national and
international journals.
Abhijit Kundu (abhijitofcal@yahoo.co.in) is Assistant
Professor and Head in the Department of Commerce,
Vision 20(3)
Barrackpore Rastraguru Surendranath College, under the
West Bengal State University. He received the BCom
(Hons) and MCom degrees in Accounting from the
University of Calcutta, India, in 1998 and 2000, respec-
tively. In 2013, he was awarded with the PhD degree from
the University of Calcutta. He is also an associate member
of the Institute of Chartered Accountants of India.
His current research interests include stock market price
behaviour, mutual funds and corporate finance.
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