A Study on Performance Evaluation of Initial Public Offering (IPO)

Choosing Initial Public Offering (IPO) route to acquire funds is aremarkable turning point in the history of any growing company. Whenthe company is need of huge amount of fund to handle the growing business, the existing capital contributed by the promoters would not beenough, nor can it borrow funds with specific commitment of paying competitive interest rate. The most suitable route preferred is raising equity capital from public. Through this route existing promoters or theventure capitalists (VC) get an opportunity to diversify their investmentsand to book capital gains. The act of going public itself creates a colorful feather in the cap of the company and the consequential publicity could bring indirect benefits like hiring capability and talented executives, increased market image, etc. prior to going public, the promoters are accountable to themselves, but now after going public and procuring funds from a larger public, new obligations befall the company in terms of being more transparent and meeting disclosure requirements; thus becoming more accountable to larger public. Michelacci and Suarez (2004) showed that when an industry isgrowing rapidly more start-up firms try to enter and vie with one anotherfor financing their projects. Under these circumstances VC find greater opportunities. The increased demand for VC funding could increase the cost of funds to the start-ups and they tend to go public. When companies go public, they tend to under price their shares; a phenomenon established when the share price jumps substantially on thefirst day of listing. Researchers had lot of material and data to explore thisarea of IPOs. Earlier researchers like logue (1973) and Ibbotson (1975) found that IPOs were underpriced. Under pricing of IPOs has always beenan interesting area of research for the scholars has many theories have been proposed for explaining this phenomenon. This theories show the evidence of under pricing of the new IPOs by the companies going publicdue to the choice of different ownership structures by the management. Inthese study, the under pricing as on the first day of listing has been taken as the basis of study for the manufacture sector which is quite different from the other sectors