Article

Performance of Indian IPOs: Global Business Review

18(3) 734–749
An Empirical Analysis © 2017 IMI
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0972150917692193
http://gbr.sagepub.com

Rekha Handa1
Balwinder Singh2

Abstract
The present research study contributes to the extant literature on underpricing rather uniquely by
addressing the under-researched linkage of corporate governance to underpricing. The originality of
this effort also lies in being one of the initial efforts of exploring governance in context of initial public
offering (IPO) underpricing in Indian settings. The study comprises an empirical analysis of 404 Indian
IPOs studied for their board structures and ownership attributes using IPO prospectuses. Drawing sup-
port from the signalling theory, the variables board size and board committees exhibit a significant posi-
tive relationship to the IPO returns on the listing day. In Indian markets characterized by concentrated
family-owned firms, promoter ownership does work as an effective signal for investors who take cues
of firm potential from ownership patterns. Corporate governance measures have a miniscule contribu-
tion in explaining the underpricing of Indian IPOs and indicating that investors do not incorporate these
as a major consideration in their investment decision.

Keywords
Initial public offering, underpricing, corporate governance, board of directors, India

Introduction
Initial public offering (IPO) provides an opportunity to the issuing company to tap wider pool of public
funds for capital needed to fund its future growth. Due to its inherent characteristics and associated
anomalies, IPOs have been attracting interest of researchers’ world over. Pricing of IPOs, and more
specifically their underpricing, remains the most contentious issue which is characterized as an IPO
anomaly. Underpricing, a performance indicator unique to IPO context, represents the difference between
valuations of firm by investment banker and by the stock market at the end of first day of public trading.
It is referred to as money that initial shareholders ‘leave on the table’ (e.g., Tully, 1999). IPO underpricing

1
Department of Management, DAV University, Jalandhar, Punjab, India.
2
Department of Commerce, Guru Nanak Dev University, Amritsar, Punjab, India.

Corresponding author:
Rekha Handa, Department of Management, DAV University, Jalandhar 144012, Punjab, India.
E-mail: rekha2802@gmail.com
Handa and Singh 735

is believed to reduce the capital received by firm through IPO process (Lin & Chuang, 2011) and is
regarded as a direct wealth transfer from founders and initial shareholders to new external investors
(Filatotchev & Bishop, 2002). The economic magnitude of IPO underpricing is huge and being globally
pervasive the phenomenon has been widely documented.
A large number of studies have addressed the underpricing issue and attempted to find explanations
to this premium. Several theories have emerged to explain these positive initial returns such as information
asymmetry (Baron, 1982), winners’ curse hypothesis (Rock, 1986), underwriters’ reputation theory
(Carter & Manaster, 1990) and signalling hypothesis (Allen & Faulhaber, 1989; Grinblatt & Hwang,
1989; Welch, 1989). In spite of the numerous explanations, the anomaly remains far from being resolved.
Most of the explanations, however, revolve around information asymmetry between issuing firm and
other participants in the IPO process. This asymmetric information is higher for smaller and newer firms
and this increases agency costs which manifest as underpricing.
To address the challenges of information asymmetry, firms adopt varied mechanisms to signal firm
quality and communicate their true value to investors. This is necessary in the light of prevailing
uncertainty in the minds of investors. Signals and signalling mechanisms have been widely studied in
finance literature and in relation to IPOs as well. Despite the extant literature on signalling in context of
IPO underpricing, little attention has been devoted to association between corporate governance attributes
and IPO initial performance particularly in the context of Asian economies (Yong, 2007). Corporate
governance has emerged as an explanation to underpricing in the times of shift towards qualitative
signals in the backdrop of losing relevance of financial and quantitative information in communicating
credibility of new issue firms. The disturbing regularity of corporate upheavals and financial irregularities
globally has also stimulated the growing interest in corporate governance mechanisms. Also, Yong
(2007) shared the view that corporate governance is the new area of IPO research. The originality of this
research effort lies in being one of the initial efforts of exploring effectiveness of governance as signals
at the time of IPO and its relationship to listing performance in Indian markets.
The article is structured in sections to achieve the objective. The second section reviews the literature
related to the study. The objectives and rationale of the study are discussed in the third section.
The fourth section details out the methodology adopted for the study. The data analysis has been put forth
in the fifth section. The conclusions arrived at through the study have been presented in the final section.

Review of Literature
Information gaps between the issuers and investors call for initiatives to drive out the fears in the minds
of investing public which result in the adoption of signalling mechanisms. At the heart of signalling
theory is information asymmetry (Spence, 1973) which results in unsettled doubts in the minds of
investors. A variety of signals which have been adopted by new issue firms have been documented in
literature. These include retained ownership (Keasey & McGuiness, 1992; Leland & Pyle, 1977),
underpricing for seasoned issues (Allen & Faulhaber, 1989; Ibbotson, 1975; Welch, 1989), prestigious
underwriters (Booth & Smith, 1986; Carter & Manaster, 1990; Michaely & Shaw, 1994), reputed
investment bankers (Carter, Dark & Singh, 1998; Paudyal, Saadouni & Briston, 1998), auditor reputation
(Titman & Trueman, 1986) and prestige of venture capitalists (Da Silva Rosa, Velayuthen, & Walter,
2003; Megginson & Weiss, 1991).
IPO provides a unique setting to evaluate effects of governance as effective monitoring is all the
more critical for firms going public in the face of aggravated agency conflicts (Brennan & Franks, 1997).
It is widely accepted that good corporate governance systems are associated with better corporate value
736 Global Business Review 18(3)

and is also a key element in corporate competitiveness and access to capital (Jensen & Meckling, 1976;
Shleifer & Vishny, 1997). Also, Kim and Ritter (1999) argued that the relationship between financial
information and equity values is particularly tenuous in the IPO context. Sanders and Boivie (2004)
suggest that corporate governance parameters can serve as useful screening and sorting criteria that
influence investors’ valuations of the IPO firm when primary information sources are limited or obscure.
The limited prior research exploring the relation of corporate governance to underpricing is largely
focused on the developed economies. Some studies have investigated board of directors and IPO
underpricing, using data from the USA (e.g., Certo, Daily & Dalton, 2001b; Howton, Howton & Olson,
2001). Evidence from emerging markets is rare, among the few are Chen and Strange (2004),
Lin and Chuang (2011) and Yatim (2011), which use a sample of IPO firms in China, Taiwan and
Malaysia, respectively. The impact of governance measures on performance of IPOs in small frontier
markets of West Africa facing the challenge of adoption of international governance best practices
(Hearn 2011, 2012) has also been studied. In the light of the economic significance of Indonesia, the
largest economy in Southeast Asia which attracts foreign attention and investments, Darmadi and
Gunawan (2012) explored the influence of corporate governance mechanisms on initial returns in this
emerging market. Chen and Yang (2013) failed to establish a significant relationship between underpricing
and governance and ownership structure for ChiNext IPOs. On the same lines, IPO investors on the
Alternative Investment Market (London) were found not to necessarily view the monitoring benefits of
board structure and managerial ownership as important signals of firm quality (Wu & Hsu, 2012). Clearly
concentration of past efforts has been in developed and established economies of USA (Certo et al.,
2001b; Certo, Covin, Daily & Dalton, 2001a; Dempere, 2007; Howton et al., 2001), UK (Chahine,
Filatotchev & Zahra, 2009; Filatotchev & Bishop, 2002) and France (Chahine, 2004; Mnif, 2009).
However, in light of vibrancy in economies, research efforts have been redirected towards growing and
emerging markets of Australia (Ching Yi-Lin, 2005), China (Li, 2005; Li & Naughton, 2007), Indonesia
(Darmadi & Gunawan, 2012), Malaysia (Yatim, 2011) and Singapore (Mitchell, Singh & Singh, 2008),
though Indian markets remain unexplored for this association.
The literature does highlight various dimensions to the underpricing conundrum but explanations
through corporate governance are rather limited. Indian markets which have awakened to the global calls
for stringent governance remain an interesting subject in the backdrop of dynamic IPO markets.

Objectives and Rationale of Study

The investigation of Indian markets becomes important in the light of the economic and financial stature
of India. The radical reforms in regulations and pricing, exponential growth, global distinctions and
upsurge in volumes in IPO market have generated considerable research interest in Indian IPO market.
According to Global IPO Trends Report, 2012, India ranks seventh globally in terms of number of deals
(making 3.3 per cent of the global total) and the BSE ranks ninth among the global exchanges by number
of deals (contributing 3.20 per cent to global total). The study also becomes important because the
influences of corporate governance variables on underpricing are expected to be different in emerging
markets owing to different institutional environments when compared to developed markets. Being a
pervasive phenomenon in India, especially at the time of IPO, the study of information asymmetry and
contribution of governance attributes in mitigating this asymmetry becomes an interesting research
problem. The present study aims to explore the governance preparedness of the Indian firms at the time
of going public and the role these measures play in signalling firm credibility. The study is directed
Handa and Singh 737

towards finding explanations to the underpricing riddle (after confirming the existence of underpricing
through the sample chosen for study) in the Indian contours through corporate governance measures.

Methodology

Sample
In the present study, an effort is made to study the signalling power of governance attributes, as
represented by board structures and ownership variables, and the extent to which these are incorporated
in the investment decisions of Indian investors. The sample for study is the firms which issued new
equity securities between 1 April 2001 and 31 March 2012 and got listed on the Bombay Stock Exchange
(BSE). IPOs have been included 2001 onwards as this was the time when SEBI specified principles of
Corporate Governance and introduced a new clause 49 in the Listing agreement of Stock Exchanges to
be followed by companies seeking listing. The final sample consists of 404 Indian IPOs which was
reached at on the basis of availability of prospectus of issuing firms. With respect to some of the variables,
information was not available and so the sample had to be trimmed down on those counts as clear from
the statistical summary of the variables.

Data Sources
The primary source of data pertaining to corporate governance variables has been obtained from the IPO
filing document called prospectus. The IPO prospectus is a compulsory document necessary to file at the
time of issue with the capital market regulator, SEBI and also with the public office of companies in
respective state called the Registrar of Companies. The IPO prospectus for each of the company has been
procured from the SEBI website (www.sebi.gov.in). The companies whose filing documents were not
available from SEBI website, the prospectus as available on company’s website were taken. For
calculation of returns, the market prices of securities and respective market returns (SENSEX values)
have been extracted from the reliable and accurate database of Ace Equity and BSE website (www.
bseindia.com). In addition to these, the information relating to firm attributes and issue variables has
been collated from Prowess and Capitaline database. Ace Equity, Prowess and Capitaline are reliable
databases for detailed information about Indian firms and largely resorted to by researchers and
academicians.

Statistical Model
The signalling potential of governance methods and their relationship with IPO’s initial returns has been
studied using hierarchical regression modelling with two measures of returns as dependent variable.
The model employed is as follows:

Underpricingi = α + β1Subscription ratioi + β2 Issue sizei + β3 Issue pricei + β4 Listing delayi + β5 IPO
Agei + β6 Total Assetsi +β7 Board Sizei + β8 Board Committeesi + β9 Board independencei
+ β10 Women directori + β11 Board Agei + β12 Related Board Members+ β13 Board
738 Global Business Review 18(3)

Reputation + β14 Promoter ownershipi + β15 Block shareholderi + β16Top 10 Ownershipi

+ εi.

Before running regressions, the model has been tested for the problems of multicollinearity and
heteroscedasticity. The existence of heteroscedasticity was confirmed and as a solution, White’s
heteroscedasticity consistent standard errors have been used. VIFs (Variance-Inflating Factors) have
been computed for explanatory variables to check the problem of collinearity between variables.
However, no violation of this was noticed as all VIF values were found to be below 10 (Gujarati, 2003).

Measurement of Variables
The variables included in the study are categorized as dependent variable and independent variables and
control variables. The independent variables have been categorized as firm variables, issue variables and
corporate governance proxy variables. Firm and issue variables have been included in the model as
control variables to provide for their potential influence on listing day pricing performance. Corporate
governance variables are the interest variables which have been represented through board structure
variables and ownership-related measures. The details of the variables employed for the study have been
presented in Table 1. Two measures of underpricing have been calculated for the study as dependent
variables under separate models. As a first measure of return, raw return (RR) has been used, wherein
underpricing is measured using initial returns, calculated as the closing price on the first trading day in
secondary market minus offer price, divided by offer price (Arthurs, Hoskisson, Busenitz & Johnson,

Table 1.  Operationalization of Research Variables

Variables Operationalization
Dependent Variable
Underpricing on listing day 1. Raw return—Closing price on the first trading day on the secondary
market minus offer price, divided by offer price
2. MAER—Raw return minus the market return as measured by the BSE’s
sensitive index
Independent Variables (Board related)
Board size Total number of directors on the board
Board committees Inverse of total number of board committees to assist the board
Board independence Percentage of independent directors on the board
Women directors Percentage of women directors on the board
Age of board Average of the individual age of all board members
Related board members Number of members on the board who are related to each other
Board reputation The total number of board directorships held by non-executive directors at
other firms
Independent Variables (Ownership related)
Promoter ownership Percentage of shares held by board of promoters (founders) at the time of
issue
Handa and Singh 739

Variables
Promoter ownership squared
Block holder ownership
Top 10 shareholding
Top 10 shareholding squared
Control Variables (Issue and firm related)
Subscription ratio
Issue size
Listing delay
Issue price
IPO age
Total assets
Source: Prepared by authors.
Operationalization
Square term of the percentage of shares held by board of promoters
(founders) at the time of issue
Number of shareholders holding shares more than 10 per cent of total shares
to denote concentrated ownership
Percentage of shares owned by the 10 largest shareholders of a firm
Square term of percentage of shares owned by the 10 largest shareholders of
a firm
Number of times the IPO has been subscribed: indicator of over or under
subscription
Logarithm transformation of proceeds received from issuing new shares
(in crores)
Number of days between close of issue and listing on BSE
The offer price of shares issued through IPO
Logarithm transformation of number of years between date of incorporation
and IPO issue date
Logarithm transformation of book value of total assets as expressed in crores
of rupees

2008; Certo et al., 2001b). Secondly, market-adjusted excess return (MAER), regarded as adjusted
underpricing, has been used. To adjust for the market, movements between prospectus date and the first
trading day of the IPO, MAER is calculated by subtracting the market return (as measured by the BSE’s
sensitive index) from the initial RR.
The justification for the control variables has been drawn from the extant IPO literature.
The subscription ratio has been included to provide for the demand for the issue. Koh and Walter (1989)
proposed that higher the interest and demand of issue (proxy for subscription ratio) higher would be
degree of underpricing. Chahine and Tohme (2009) incorporated oversubscription for its use by issuers
to increase the likelihood of IPO’s success (Amihud, Hauser & Kirsh, 2003). Issue size has been included
to capture the inherent and fundamental risk of an IPO. Ritter (1991) argues that smaller issuers tend to
have better initial returns and worse long-term performance compared to larger issuers (Li & Naughton,
2007). Corhay, Teo and Rad (2002) find a negative relation between long-run performance of IPOs and
inverse of issue price in contrast to the documented positive relation in Indian context (Sehgal, 2009).
In the scenario of information asymmetry characterized by existence of both informed and uninformed
investors, on the lines of Lee, Taylor and Walter (1996), the listing delay is a variable to proxy for degree
of informed demand. IPO age is included for its reported relationship with IPO performance (e.g., Certo
et al., 2001b; Megginson & Weiss, 1991; Mikkelson, Partch & Shah, 1997; Ritter, 1998). Researchers
suggest that older firms which have been in the market for larger time are perceived to be less risky and
experience less severe uncertainty and hence better expected performance (Bansal & Khanna, 2013;
Durukan, 2002; Firth, 1997; Georgen et al., 2007; Mikkelson et al., 1997). IPO firms with larger asset
base are shown to have higher survival rate (Jain & Kini, 1999), better long-run performance (Durukan,
2002; Georgen et al., 2007) and positive association with initial returns of IPO firms (Certo et al., 2001b;
Hearn, 2011; Ritter, 1984, 1991; Mikkelson et al., 1997; Mnif, 2010).
740 Global Business Review 18(3)

Board size is a central issue in corporate governance. From the strategic decision-making perspective,
smaller boards are associated with group cohesiveness and more effective decision-making (Goodstein,
Gautam & Boeker, 1994; Mak & Roush, 2000). Carter et al. (1998), Certo et al. (2001a), Yatim (2011),
Darmadi and Gunawan (2012) show that board size and underpricing are negatively related. On the other
hand, positive relationship to underpricing has also been reported (e.g., Hearn, 2011; Li & Naughton,
2007; Mnif, 2010; Pfeffer, 1972). Literature regarding the beneficial impact arising from the constitution
of board committees on the underpricing levels is almost non-existent. It is perceived that more board
committees can provide better monitoring leading to mitigating information asymmetry (Handa, 2014).
Independent directors are expected to monitor management more effectively being more objective and
independent in approach (Fama & Jensen, 1983). In contrast, boards dominated by outsiders may also
lead to over-monitoring and stifle strategic actions (Baysinger & Butler, 1985; Darmadi & Gunawan,
2012; Fama & Jensen, 1983; Goodstein et al., 1994). Hearn (2011), Chen and Yang (2013) and Thorsell
and Isaksson (2014) are the limited authors who employed gender diversity as a variable in explaining
underpricing keeping scope for further explorations. An experienced board can help substitute for
information access and fend off certain problems associated with information asymmetry at the time of
offer (Certo, Covin et al., 2001a; Certo, Daily et al., 2001b). If board can serve as signal to communicate
to investors the performing potential of firm as argued by researchers (e.g., Certo et al., 2001b; Higgins
& Gulati, 2003; Thorsell & Isaksson, 2014), the experience of the boards can strengthen this signal and
hence contribute to the performance of the firms. Family ties and connections among board members
which are not rare especially in Indian settings may solve manager–owner conflicts of interests, and may
also give rise to minority-shareholder expropriation and/or private benefits of control (Chahine &
Goergen, 2013). Multiple board appointments are expected to build the reputational capital of firm
(Fama, 1980; Fama & Jensen, 1983) and enable access to valuable information and resources (Borch &
Huse, 1993; Filatotchev & Bishop, 2002; Pfeffer & Salancik, 1978). This reputational advantage lends
legitimacy to the corporation (Higgins & Gulati, 2003) and also can work as signal of effective monitoring
(Certo et al., 2001b; D’Aveni, 1990; Shivdasani, 1993).
Other than board structure variables, ownership variables have also been included as ownership
distributions are expected to affect the ability of the shareholders to control agency problems (Jensen &
Meckling, 1976) and affect firm value (Berle & Means, 1932). Founding family members have more
incentive to improve firm performance than non-family decision-makers (Chahine, 2004; Mcconaughy,
Metthews & Fialko, 2001). In contrast, the founders as controllers may tend to favour family shareholders
at the expense of the public investors (Shleifer & Vishny, 1997) giving way to the risk of non-professional
managerial approach (Classens et al., 2000). The squared term of promoter ownership is also included to
check the non-linearity of relationship (as in Chahine et al., 2009). Ownership concentration expressed
through block shareholders and ownership percentage of top 10 shareholders has also been studied.
Concentrated ownership, where on one side, can work for aligning the interests of management and
shareholders and thereby enhance firm value (Li & Simerly, 1998), can also lead to extraction of private
benefits leading to additional costs (Shleifer & Vishny, 1997). Total percentage of shares held by top 10
shareholders expresses extent of dispersed or concentrated ownership levels. To understand the exact
relationship, the squared term is also included for studying the existence of non-linearity of relationship.

Analysis and Interpretations

At the outset, an insight is attempted into the statistical behaviour of research variables through the
summary statistics. Table 2 reports the descriptive statistics of research variables included in the
Handa and Singh 741

Table 2.  Summary Statistics of Variables Employed in Regression

Variables Mean Median Maximum Minimum Std Dev. N

Raw return 22.90 12.79 323.50 −94.29 55.35 404
Market-adjusted excess return 21.61 9.45 285.44 −101.78 53.57 404
Subscription ratio 19.29 6.94 175.88 0.00 26.50 403
Issue size 386.81 91.70 15475.09 2.16 1276.06 403
Log issue size 4.70 4.52 9.65 0.77 1.35 403
Issue price 175.37 114.00 1310.00 10.00 189.19 404
Inverse of issue price 0.02 0.01 0.10 0.00 0.02 404
Listing delay 23.01 20.00 404.00 12.00 28.61 395
IPO age (years) 15.20 12.29 102.47 0.31 13.14 404
Log IPO age 1.11 1.12 2.01 0.12 0.29 404
Total assets 1728.11 119.99 92522.24 1.09 7831.91 402
Log total assets 5.11 4.79 11.44 0.08 1.79 402
Board size 7.78 8.00 20.00 4.00 2.26 404
Board committees 3.56 3.00 10.00 1.00 1.23 403
Inverse of board committees 0.31 0.33 1.00 0.10 0.09 403
Independent directors 49.63 50.00 80.00 0.00 8.91 404
Women directors 0.38 0.00 3.00 0.00 0.60 404
Age of board 51.76 52.67 66.42 32.57 5.70 403
Related board members 1.90 2.00 7.00 0.00 1.54 388
Board reputation 26.26 13.00 301.00 0.00 35.34 403
Promoter ownership 83.04 89.45 100.00 5.81 18.69 403
Block shareholder ownership 2.59 2.50 6.00 0.00 1.25 404
Top 10 ownership 92.63 98.34 100.00 25.86 11.53 404
Promoter ownership square 7244.17 8001.30 10000.00 33.76 2771.50 403
Top 10 ownership square 8713.64 9670.76 10000.00 668.74 1860.28 404
Source: Prepared by authors after statistical analysis.

regression model. Of particular interests to the study are the results for the underpricing and the board
variables. Average returns (both raw and adjusted) stand at around 22 per cent confirming the existence
of underpricing phenomenon among Indian IPOs. The governance variables and their statistics provide
a sketch of the relationship which is further probed through regression analysis.
These regression results have been presented in Tables 3 and 4. In order to explore the contribution of
corporate governance variables in explaining the initial returns, four separate regression models have
been built. Model 1 includes only the control variables. Model 2 combines the control variables with the
board structure components while Model 3 replaces board composition with ownership variables. These
help to bring out the effects of two broad dimensions of governance and thus compare their explanatory
power. Model 4, the final model, integrates all the control and governance variables together with the
quadratic forms for their plausible non-linear relationship with dependent variable.
The control variables overall explain 32 per cent of the total variations in dependent variable with
subscription ratio, issue size and issue price being significant in all four models. The subscription ratio
is positive and significant (as in Chahine & Tohme, 2009; Chen & Yang, 2013) indicating that higher
subscription ratio reflects demand for the issue which is perceived as a signal of good quality and thus
better performance and higher returns. Issue size reflects a negative and statistically significant
relationship to underpricing lending support to observations made by Hearn (2012) in sub-Saharan
Africa and Li (2005) in Chinese IPO market. The findings confirm that firms with larger offerings
742 Global Business Review 18(3)

Table 3.  Relationship between Corporate Governance Measures and Initial Unadjusted Returns

Independent Variables Model 1 Model 2 Model 3 Model 4

Constant 31.704 −20.883 75.091 7.214
(2.044)** (−0.778) (1.283)# 0.106
Subscription ratio 1.167 1.106 1.196 1.142
(11.568)*** (11.269)*** (11.224)*** (11.064)***
Log (issue size) −7.059 −7.314 −7.968 −8.566
(−2.190)** (−2.303)** (−2.360)*** (−2.547)***
1/Issue price 509.105 427.342 530.750 450.280
(2.383)*** (2.056)** (2.470)*** (2.200)**
Listing delay −0.0163 −0.038 −0.018 −0.038
(−0.072) (−0.174) (−0.080) (−0.179)
Log (IPO age) 4.744 10.609 6.201 11.534
(0.5580) (1.436)# (0.720) (1.407)#
Log (total assets) −2.104 −2.489 −1.635 −2.162
(−1.028) (−1.241) (−0.799) (−1.079)
Board size 2.217 2.775
(2.147)** (2.768)***
Board committees 78.705 77.125
(3.147)*** (3.117)***
Independent directors 0.2428 0.315
(1.1057) (1.407)#
Women directors −2.217 −3.600
(−0.4575) (−0.696)
Average age of board 0.0452 0.183
(0.1009) (0.4022)
Related board members −1.924 −2.271
(1.388) (−1.499)
Other directorships 0.0523 0.055
(1.046) (1.076)
Promoter ownership 2.131 2.364
(2.805)*** (2.904)***
Block shareholders −1.391 −0.168
(−0.663) (−0.079)
Top 10 ownership −3.310 −3.661
(−2.561)*** (−2.659)***
Promoter ownership squared −0.014 −0.016
(−2.663)*** (−2.742)***
Top 10 ownership squared 0.022 0.025
(2.687)*** (2.865)***
R2 0.3337 0.3511 0.3442 0.3743
Adjusted R2 0.3234 0.3278 0.3318 0.3427
Number of observations 395 377 394 376
F-statistic 32.392*** 15.107*** 18.744*** 11.864***
Source: Prepared by authors after statistical analysis.
Notes: *, ** and *** indicate statistical significance at the level of 10%, 5% and 1%, respectively. T-statistics are provided in the
parentheses. # loosely significant at 20% level of statistical significance.
Handa and Singh 743

Table 4. Relationship between Corporate Governance Measures and Initial Market-adjusted Excess Returns

Independent Variables Model 1 Model 2 Model 3 Model 4

Constant 30.426 −18.765 75.625 10.475
(2.010)** (0.707) (1.320) 0.159
Subscription ratio 1.135 1.082 1.161 1.114
(11.739)*** (11.343)*** (11.444)*** (11.191)***
Log (issue size) −5.991 −5.834 −6.777 −6.930
(−1.910)** (−1.925)** (−2.066)** (−2.173)**
1/Issue price 495.783 435.751 517.046 458.827
(2.376)*** (2.176)** (2.455)*** (2.323)**
Listing delay −0.075 −0.094 −0.076 −0.094
(−0.368) (−0.478) (0.380) (−0.491)
Log (IPO age) 4.502 10.492 5.911 11.456
(0.538) (1.461)# (0.695) (1.569)
Log (total assets) −2.563 −2.994 −2.147 −2.716
(−1.277) (−1.542)# (−1.070) (−1.403)
Board size 1.692 2.211
(1.682)** (2.264)**
Board committees 70.193 68.586
(2.768)*** (2.759)***
Independent directors 0.239 0.308
(1.092) (1.378)
Women directors −2.032 −3.264
(−0.432) (−0.652)
Average age 0.053 0.183
(0.123) (0.412)
Related board members −1.629 −1.942
(−1.200) (−1.311)
Other directorships 0.048 0.051
(0.969) (0.995)
Promoter ownership 1.892 2.106
(2.540)*** (2.646)***
Block shareholder ownership −1.044 0.141
(−0.518) (0.070)
Top 10 ownership −3.144 −3.429
(−2.489)*** (−2.543)***
Promoter ownership squared −0.013 −0.014
(−2.424)*** (−2.508)***
Top 10 ownership squared −0.021 0.023
(2.613)*** (2.740)***
R2 0.3357 0.3506 0.3506 0.3713
Adjusted R2 0.3254 0.3273 0.3318 0.3395
Number of observations 395 377 394 376
F-statistic 32.595*** 15.034 18.695*** 11.680***
Source: Prepared by authors after statistical analysis.
Notes: *, ** and *** indicate statistical significance at the level of 10%, 5% and 1%, respectively. T-statistics are provided in the
parentheses. # loosely significant at 20% level of statistical significance.
744 Global Business Review 18(3)

contribute to diluting the uncertainties of investing community. Issue price shares a positive significant
relationship with underpricing contradicting the findings of Li (2005) and Bédard, Coulombe and
Courteau (2008) suggesting that the price at which a firm offers shares is perceived as inherent ability of
the firm to command premium for its issue. The variable listing delay gives no significant results like in
case of Chinese IPO market (Ching-Yi Lin, 2005; Li, 2005). The negative sign of listing delay coefficients
lead to conclusion that longer gap in listing results in lower underpricing possibly because the gap helps
investors to gather information and take informed decisions.
The coefficients for IPO age are positive in line with Mitchell et al. (2008) in Singapore, Mnif (2010)
in France, Yatim (2011) in Malaysia and Hearn (2012) in Sub Saharan Africa suggesting that firms with
longer standing in markets tend to dispel the apprehensions of investors but this lacks statistical
significance. Results for total assets show negative association but lacks significance which is supported
by previous findings (Bédard et al., 2008; Chen & Yang, 2013; Ching-Yi Lin, 2005; Hearn, 2011). On
the same lines, these variables are regressed with MAERs and the results obtained have been presented
in Table 4. Moving on to governance variables, Model 2 includes board composition attributes along
with the control variables while Model 3 replaces the board components with ownership measures.
Results are found to be robust across all models as suggested by the statistically significant F-values.
Board size is found to be an important consideration for investors in India. From the market’s point
of view, investors may perceive a large board as a signal of high degree of monitoring and effective
decision-making. This relationship finds its support from Li and Naughton (2007), Mnif (2010) and
Hearn (2011) though lies in contradiction to Carter et al. (1998), Certo et al. (2001b), Darmadi and
Gunawan (2012). The findings for board committees as a component of governance mechanism and its
relationship to initial underpricing are consistent with results of Hearn (2011, 2012) which relate to
African markets. From signalling perspective, the number of board committees does work as a signal for
new issue firms, in the light that larger number of committees reflect the voluntary initiatives by firms
for better working of the concern (Handa, 2014). On the other hand, this relationship can also be
indicative of the shortcomings as Hearn (2011) conjectured in context of West African region that
establishment of committees may be superfluous and lacking in genuine independence which may stand
true for the Indian markets as well.
Board independence does not seem to be adopted as an indicator of issue quality by the investors in
Indian IPO market (insignificance of coefficient) which may be because board independence remains a
contentious issue. Denis and McConnell (2003) and Dahya and McConnell (2005) had proven that
higher proportion of outside directors does not assure better performance and Li and Naughton (2007)
and Yatim (2011) also found the positive but insignificant impact of board independence on IPO
underpricing. The coefficient for percentage of women directors is negative implying that higher
percentage of women as directors tends to decrease levels of underpricing and vice versa, but lack of
statistical significance of the coefficient leaves the issue unsettled. Positive direction of relationship of
age of board members points out that younger boards result in lower underpricing levels indicating that
mature boards are taken as indicators of good quality of board and firm’s potential to perform.
The coefficient for related members is negative though only loosely significant signifying that larger
number of relatives on boards tends to reduce quantum of underpricing providing support for ‘alignment
of interests’ hypothesis in contrast to entrenchment tendencies. The lack of statistical validity of these
results, however, does not enable reaching a concrete conclusion. Board reputation is found to be
positively related to underpricing consistent to the results of Yatim (2011) which provides support to the
argument of Filatotchev and Bishop (2002) that outside board memberships create a negative impact on
the investors’ assessment of firm quality although insignificance of these coefficients fail to lend
complete support to the argument. These findings, however, stand in contrast to conclusions drawn by
Thorsell and Issakson (2014) for Swedish IPOs.
Handa and Singh 745

Model 2 including board structure variables is a statistically significant model and explains almost 33
per cent of the quantum of underpricing. The variables of board size and board committees support the
behaviour of this pricing anomaly with the help of signalling theory and related agency and information
asymmetry hypotheses. The contribution of board variables to the model when compared on the basis of
increase in value of adjusted R2 is very negligible (0.44 per cent) indicating that board composition does
not matter much to Indian investors.
The results with MAER as the dependent variable also highlight a similar trend and significance of
variables. Model 1 which incorporates the control variables is robust with three of the variables having
significant coefficients. Model 2 highlights the low contribution of board variables. Model 3 introduces
the ownership variables. Ownership by promoters is included as a measure of family ownership which
is likely to impact performance of IPOs under the influence of family interest protection (Shleifer &
Vishny, 1997) and alignment of interests (Fama & Jensen, 1983) hypotheses. With the clues of
operationalization of both these hypotheses and in accordance with Chahine (2004), efforts to check
non-linearity of promoter ownership have been made through introduction of the square term.
The significance of coefficients of promoter ownership and its squared term confirm the existence of
non-linear relationship highlighting the signalling potential of this ownership variable. The curvilinear
relationship explains that increasing ownership levels do address the concerns of information asymmetry
but as levels of family ownership increase, the worries of sacrificing general interests for self-interests
start dominating. The ownership by the top 10 shareholders is a significant variable in the model which
shows the similar trend as promoter ownership indicating the operationalization of entrenchment
hypothesis and alignment hypothesis with changing levels of ownership. The present study finds support
in the works of Howton et al. (2001), Fan, Wong and Zhang (2007) and Hearn (2012) who proved
the existence of negative relationship of measures of ownership concentration with underpricing. The
negative relationship between underpricing and levels of block shareholders provides some indication of
their role in corporate governance and its enforcement within firms in countries with weaker levels of
investor protection. Total shareholding of the top 10 shareholders of the IPO firm shares a large, negative
and statistically significant level and remains strongly significant for the square term as well confirming
the existence of non-linear relationship. The exploration of this measure holds higher eminence for
Indian markets where family-controlled firms and concentrated ownership patterns are pervasive.
A comprehensive model, Model 4, is built to reflect the aggregate effects of corporate governance
which is a robust model. The model (for both RR and MAER) is better in its explanatory power when
compared to previous literature (Certo et al., 2001b; Chahine et al., 2009; Darmadi & Gunawan, 2012;
Filatotchev & Bishop, 2002; Hearn, 2011; Mnif, 2010; Wu & Hsu, 2012; Yatim, 2011). The overall
conclusion, however, which is in consonance with past findings is that the explanatory power of
governance mechanisms with regard to initial pricing performance is low, the reasons for which need to
be further explored for concrete inferences.

Conclusion
In this study, explanations to the underpricing phenomenon are sought through corporate governance
mechanisms which the firm puts in place at the time of going public. Board size comes out as a significant
variable and a signal to investors of the firm quality. The results also indicate a tendency of larger boards
to result in higher underpricing which stems from coordination problems resulting in increased costs.
Board committee is the only other board variable which presents explanations to high initial returns.
Positive relationship of board committees to underpricing raises doubts as to lacking genuine
746 Global Business Review 18(3)

independence especially in Indian contours which are fighting accusations of weak governance. Results
confirm to a non-linear relationship shared by promoter ownership and ownership by top 10 owners with
respect to initial pricing performance. The signalling potential of these ownership variables is confirmed
highlighting that ownership and control of new issue firms is an important consideration for the investors
when taking the investment decision. Another fact which surfaces from these results is that higher
ownership in the hands of promoters does dispel uncertainty and problems of information asymmetry but
at higher levels tendencies of entrenchment of interests become evident. Findings confirm to tendencies
of concentrated ownerships in Indian markets but at higher levels of concentration underpricing tends to
increase. These confirm that both alignment of interest and entrenchment hypothesis work in conjunction
at different levels of ownership.
On the whole, corporate governance measures have a miniscule contribution (only 2%) in explaining
initial returns. There is confirmation of the fact that these do qualify as signals which are frantically
resorted to at the time of IPO by the issuers but need is to integrate these into decision criteria by
emphasizing on governance in both letter and spirit. Explanatory power of these governance measures
can definitely be enhanced when governance parameters evolve as distinguishing criteria among firms
and investors realize their worth and potential in enhancing performance. Better governed IPOs should
ideally perform better and this realization on the part of Indian investors can add to the eminence of
governance mechanisms as effective signals and become a basis for better performance.

Acknowledgement
We are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve the
quality of the article. The authors also express their gratitude to the entire editorial team for all help in bringing the
submission to the present form. Usual disclaimers apply.

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