The Strategic Role of Issue Composition and Market Sentiment in Determining Initial Public Offer (IPO) Underpricing and Valuation in India
Abstract
This study investigates the strategic interplay between Issue Composition (Proportion of Fresh Capital vs. Offer for Sale (OFS)), Market Sentiment ("hot" vs. "cold" markets), and the resulting Underpricing and Valuation of 236 Initial Public Offerings (IPOs) in the Indian capital market during 2009-2020. The analysis confirms a negative relationship between the proportion of fresh capital and underpricing, with full OFS issues (0% fresh) recording the highest average underpricing (20.61%) and 100% fresh issues recording the lowest (8.04%). Critically, a mean comparison shows that issuers opportunistically float a significantly lower proportion of fresh shares during hot market periods (51.62%) compared to cold periods (63.51%), suggesting the exploitation of market waves for existing shareholder exit. Furthermore, Ordinary Least Squares (OLS) regression analysis reveals that a lesser proportion of fresh issue is significantly associated with a higher Price-to-Book (P/B) Ratio, indicating more aggressive valuation when existing shareholders dominate the offering. The findings support the notion that issue structure acts as a signal to investors and that issuers strategically utilize market conditions to maximize proceeds for both the company and selling shareholders, reinforcing the relevance of prospect theory in the Indian IPO context.