STUDY ON PERFORMANCE OF IPO AND PERCEPTION OF INVESTORS: EVIDENCE FROM INDIA

Abstract

Initial Public Offer (IPO) plays vital role in the expansion of any company. IPO is selling of the shares of a company for the first time to the public in the capital markets. Initial public offerings (IPOs) are increasingly significant on a global scale, as they offer companies a means to raise funds and facilitate growth. Additionally, IPOs are viewed as a valuable tool for investors to potentially generate profits, contingent on the health and stability of the company in question. This study focuses on evaluating the performance of IPOs in the Indian capital market, both in the short and long term, and examines the factors influencing investor decisions when investing in IPOs. Short-Term and Long-Term Performance of IPOs The study reveals that IPOs in the Indian market exhibit notable short-term gains, particularly on the listing day. Analysis of 30 IPOs listed between August 2021 and June 2024 shows an average listing day return of 29.96%, with returns ranging from - 23.79% to 117.63%. The highest returns were observed for companies like KRN Heat Exchanger and Refrigeration Limited (117.63%), NACDAC Infrastructure Limited (99.49%), and Hamps Bio Limited (99.49%). However, the performance of IPOs tends to stabilize or decline after the initial trading days. By the third trading day, the average return drops to 14.52%, and by the end of the first month, returns are slightly lower than those on the listing day. This trend suggests that while IPOs offer lucrative opportunities for short-term gains, their long-term performance requires careful scrutiny. The study also highlights the role of market conditions and investor sentiment in shaping IPO performance. For instance, the standard deviation of 38.89% for listing day returns indicates high variability, underscoring the inherent risks associated with IPO investments. Furthermore, the market-adjusted short-term performance of IPOs begins to decline after the third trading day, with cumulative abnormal returns converging toward zero by the end of the first month. This finding aligns with the "fad hypothesis," which posits that the initial exuberance surrounding IPOs often fades over time.Investor Perception and Decision-Making Investor perception plays a crucial role in the success of IPOs. The study identifies three key factors influencing investment decisions: company goodwill, company performance, and the sector in which the company operates. Correlation analysis reveals a strong positive relationship between these factors and investment decisions, with Pearson coefficients of 0.719, 0.573, and 0.751, respectively, all significant at the 1% level. This indicates that investors are more likely to invest in IPOs of companies with strong reputations, solid financial performance, and favorable sectoral prospects. Additionally, the study finds that the level of oversubscription is a significant determinant of IPO performance. Regression analysis shows that a one-unit increase in oversubscription leads to a 0.102-unit increase in IPO returns. This suggests that high demand for an IPO, reflected in its oversubscription rate, can drive better short- term performance. Other factors, such as issue price, profit after tax, and promoters' holdings, were found to have negligible impact on IPO returns. Practical Implications The findings of this study have important implications for various stakeholders:  Investors: Investors can leverage the insights to make informed decisions, particularly by focusing on oversubscription rates and short-term trading strategies. For instance, selling shares on the listing day could lock in gains, while holding shares for the long term requires thorough fundamental analysis.  Companies: Companies planning to go public can benefit from understanding the factors that attract investors, such as strong financials and sectoral growth potential. They can also strategize their IPO pricing and marketing efforts to maximize oversubscription.  Regulators: The study underscores the need for regulatory measures to ensure transparency and protect investor interests, given the high variability and risks associated with IPO investments. vi This research explores the dual dimensions of Initial Public Offerings (IPOs) in the Indian capital market—their financial performance and investor perception—with the objective of providing a holistic understanding of IPOs as both investment tools and strategic instruments for companies. Conducted as part of the Post Graduate Diploma in Management program, the study offers insights that are both academically rigorous and practically relevant for investors, financial analysts, and corporate decision-makers. This research project offers a comprehensive study of the performance of Initial Public Offerings (IPOs) in the Indian capital market and investigates the perception and behavior of investors towards IPO investments. The study spans both the short-term (listing day and early trading days) and long-term performance of IPOs, with the aim of identifying key drivers of returns and understanding investor strategies and sentiments. It also aims at performing a detailed analysis of the performance of IPOs and it will help investors in making an informed decision about their future investment in IPO. The conclusion can also help to conclude if IPO can be a long-term investment tool or a short-term opportunity to gain high profits.