research paper on ipo

Inclusive mapping of initial public offerings: a bibliometric and literature review study

• Published: 02 April 2022
• Volume 57 , pages 655–700, ( 2023 )

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• Waqas Mehmood   ORCID: orcid.org/0000-0002-7975-220X 1 ,
• Rasidah Mohd-Rashid 2 ,
• Yasir Abdullah 3 ,
• Ataul Karim Patwary 4 &
• Attia Aman-Ullah 5  

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This study aims to present a review and analysis of initial public offerings (IPOs) literature, both empirical and theoretical, given that IPOs have demonstrated tremendous growth in the past decade. This paper surveys the IPO literature published throughout 1984–2020 using a meta-literature review that involves qualitative and quantitative techniques. Citation analysis (using Herzing’s Publish or Perish and VOS viewer software) and content analysis were used to review and analyse a total of 2777 papers. The findings explain significant elements in the literature, including countries, institutions, journals, authors, articles, and topics. Also presented are the co-authorship network and three research streams: (1) IPO overview and growth, (2) IPO and finance theories, and (3) IPO and stock market behavior. Based on the review and analyses of the IPO literature, this paper developed 15 future research questions to facilitate an extension of the research. Additionally, this paper developed a dual perspective of the present state of IPO research. First, it asserts that IPOs are not limited to only certain countries, jurisdictions, or vintages. Second, there are very few IPO studies available despite IPOs’ significant economic worth. To the best of the authors’ knowledge, this analysis is the first of its kind to present an empirical evaluation of IPOs using inclusive mapping.

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The authors disclosed receipt of the following financial support for the research, authorship and/or publication of this article: The authors also would like to acknowledge their gratitude for funding from the Geran Penjanaan (S/O Code: 21124) provided by Universiti Utara Malaysia, Malaysia.

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Rasidah Mohd-Rashid

Department of Business Administration, College of Administration and Economics, Almaaqal University, Basrah, Iraq

Yasir Abdullah

Faculty of Hospitality, Tourism and Wellness, Universiti Malaysia Kelantan, 16100, Pengkalan Chepa, Malaysia

Ataul Karim Patwary

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Mehmood, W., Mohd-Rashid, R., Abdullah, Y. et al. Inclusive mapping of initial public offerings: a bibliometric and literature review study. Qual Quant 57 , 655–700 (2023). https://doi.org/10.1007/s11135-022-01387-9

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Accepted : 20 March 2022

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Qualitative Research in Financial Markets

ISSN : 1755-4179

Article publication date: 15 September 2023

Issue publication date: 10 April 2024

This paper aims to review, discuss and synthesize the literature focusing on the Indian initial public offering (IPO) market. Understanding the Indian IPO market can help answer broader corporate finance questions. The growing number of IPOs in the Indian context, coupled with the increasing importance of the Indian economy in the global market, makes this review an essential topic.

Design/methodology/approach

The systematic literature review methodology was adopted to review 111 papers published between 2002 and 2021. The authors used the Preferred Reporting Items for Systematic Reviews and Meta-Analyses approach during the review process. Additionally, the authors use a bibliometric review methodology to examine the pattern and trend of research in this area of interest. Furthermore, the authors conduct a critical review and synthesis of the top 20 papers based on citations. The authors also use a co-citation network and manual content analysis method to identify key research themes.

This review helps in identifying major themes of research in this area of interest. The authors find that majority of the research has focused on IPO performance whereas post-IPO performance needs critical attention as well. The authors develop a comprehensive framework and future research agenda based on their discussion.

Research limitations/implications

Meta-analysis of the literature can be conducted to gain better insights into the findings of prior studies.

Practical implications

This review paper develops a comprehensive overview on Indian IPO market which can be of interest not only to Indian scholarship. India as an economy is increasingly gaining attention at the global level. Hence, the future research objectives as illustrated in the study can be of interest for the global scholarship also.

Originality/value

To the best of the authors’ knowledge, this is the first comprehensive review paper that examines, synthesizes and outlines the future research agenda on Indian IPO studies. This review can be useful for researchers, business policymakers, finance professionals and anyone else interested in the Indian IPO market.

• Bibliometric analysis
• Systematic literature review

Acknowledgements

The first author is thankful to IIT Kharagpur and JAGSOM.

Chatterjee, M. , Bhattacharjee, T. and Chakraborty, B. (2024), "Studies on Indian IPO: systematic review and future research agenda", Qualitative Research in Financial Markets , Vol. 16 No. 3, pp. 477-502. https://doi.org/10.1108/QRFM-10-2021-0175

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Post Listing IPO Returns and Performance in India: An Empirical Investigation

Journal of financial studies and research.

Ramesh Chandra Babu and Aaron Ethan Charles Dsouza

Christ university, bangalore, india, academic editor: gatot nazir ahmad, cite this article as: t. ramesh chandra babu and aaron ethan charles dsouza (2021)," post listing ipo returns and performance in india: an empirical investigation", journal of financial studies & research, vol. 2021 (2021), article id 104815, doi: 10.5171/2021.104815, copyright © 2021. t. ramesh chandra babu and aaron ethan charles dsouza. distributed under creative commons attribution 4.0 international cc-by 4.0.

Objectives: (a) To analyse the performance of Indian IPOs in the short term. (b) To determine the significance of abnormal return of the IPOs. (c) To study the impact of over-subscription, profit after tax, promoters’ holdings, issue price and market returns on IPO performance. Design/ Methodology/Approach: This research paper is based on empirical analysis. All the 52 IPO’s listed in the NSE (National Stock Exchange, India) during the year 2018 to 2020 were considered for the study. The study is based on secondary data. The daily share price and Nifty-50 index value were taken from NSE website ( www.nseindia.com ) and other relevant data from red-herring prospectus of the respective company. The research / statistical tools used are: Market adjusted short run performance model, Wealth relative model, ‘t’ test and regression analysis. Scope of the study: The scope of the study is limited to the IPO’s listed only in the National Stock Exchange (NSE), India. Period of study: The study covers a period from January 2018 to December, 2020. Limitation of the study: The study considers only the influence of the external factors on the performance of IPOs. Findings: The average IPO return on the first trading day is 13.52%, ranging from -23.15% to 82.16% with standard deviation of 26.72%. The average IPO return on the third trading day was the highest and is found to be14.52%, ranging from -19.22% to 117.55% with standard deviation of 18.57%. The analysis reveals that the over subscription impacts the IPO performance and the other factors namely, issue price, Profit after Tax, market returns and promoters holdings do not influence IPO returns.

Originality / Value: This is an original work that analyses the listing gain or loss and the post listing performance of IPO’s in India and other factors that might influence the listing gain or loss.

Post listing IPO returns and performance in India: An empirical investigation

Introduction

Initial Public Offering (IPO) refers to the issue of shares by the company directly to the public for the first time. The subsequent issue of shares by the company directly to the public is referred to as Follow on Public Offer (FPO). It is really a tricky decision to put the money in a relatively new company. In IPO investing, there is a chance of getting a significant first day capital gains, or long-term capital gains. On the other hand, there is a chance of incurring a significant first day capital loss, or long-term capital loss.

Usually, a company hires an investment bank to manage an IPO before it goes for a public issue. The under-writers and investment bankers assess the quality of management, future cash flows and returns before arriving at the final offer price and the comparative valuation is done based on the listed peer company.

The usual anomaly which an investor finds in an IPO issue are (a) underpricing or overpricing (b) information asymmetry (c) agency problem between the investment bank and the issuing firm. IPO underpricing refers to a situation where the listing day closing price is greater than the initial offer price and the overpricing refers to a situation where the listing day closing price is lesser than the initial offer price. An IPO maybe underpriced deliberately or accidentally. Sometimes, an IPO maybe deliberately underpriced to woo the investors or accidentally underpriced when the underwriters underestimated the demand. Information asymmetry refers to the imbalance in the knowledge of information among the investors (and other stakeholders) about the company and its potential growth.

Theories related to the study

The theories closely related with this study are the theories of Under Pricing. The IPO Underpricing theories can be broadly classified into (1) Information Asymmetry theories (2) Institutional theories (3) Ownership and Control theories (4) Behavioral theories.

The theories that support Information Asymmetry theories are: (a) Principal – Agent theory (b) Ex-ante Uncertainty theory (c) Book-Building theory (d) Signaling theory (e) Certification (f) Winner’s Curse theory (g) Entrepreneurial Wealth loss theory (h) Partial adjustment theory.

 The theories that support Institutional theories are: (a) Law-suit avoidance theory (b) Price Stabilization theory (c) Tax argument theory.

The theories that support Ownership and Control theories are: (a) Entrenchment Managerial Control theory (b) Agency-cost theory.

The theories that support Behavioral theories are: (a) Information cascade theory (b) Investor Sentiment theory (c) Prospect theory.

All the above said theories tried to give explanations as to why the IPO Under-pricing happens and the variations in in the IPO Under-pricing among different firms across different countries. Despite enough evidence of underpricing, all the available research papers show that there are no universal explanations for IPO underpricing.

Review of literature

Madan (2003) – “Investments in IPOs in the Indian capital market” examined the relationship between return on listing and issue price, issue size, age of firm, issue capital listing and was found negative. The study found that the relationship between the variables was statistically significant. The researcher also found that the issue rating was positive for relationship between returns on listing of the IPO shares and foreign equity. The study concluded that in the long run, there was a significant fall in IPO returns. The returns of initial public offerings was observed to be negative for the period of the 2 nd to the 5 th year of listing.

Vichakorn C, Kennedy D. G. (2005) –“The factors affecting on IPO return in Thai Stock Market”. The research was carried out by applying multiple regression models to study

the relationship between several variables and the initial return of the IPO. Secondary data was the necessary information for the analysis. The initial return of the IPO was regarded by the investigator as the dependent variable and 7 other variables as the independent variable.

It was found that there was 14% to 24% returns by IPOs in Thai stock market. The figure was similar with the returns seen in the international Stock markets.

Datar and Mao (2006) – “Deep underpricing of China’s IPOs: sources and implications” have suggested that the issuer company knowingly underprice the IPOs to encourage a wider subscription. According to the researcher, on the listing day of the shares, it is noted that investors are over-enthusiastic and thus bid for IPOs at a price well above the true fundamental value of the stock. This is the major reason for abnormal returns of the IPO on the listing day.

Alok Pande and R. Vaidyanathan (2007) – “Determinants of IPO Underpricing in the National Stock Exchange of India” , looks at the pricing of IPOs in the NSE. In terms of the demand that the IPO has generated among the investors, the delay in listing of the shares on the stock exchange, and the money that the company spends on marketing the initial public offering, the researchers try to understand empirically the 1st day underpricing of initial public offerings. The researchers are also trying to understand whether the Indian IPO market has any emerging trends. The research also tries to find a month in the post IPO returns. The study’s key findings was that the demand which the initial public offering had generated and the listing delay of the IPO had a significant positive impact on the first day of pricing. The money spent on the promotion of the IPO had no major effect on pricing on the first day. The study also found that the performance of the IPO post 1 month of listing is negative.

Singh and Sehgal (2008) – “Determinants of Initial and Long-Run Performance of IPOs in Indian Stock Market” investigated the possible determinants of underpricing and the long run performance of 438 Indian initial public offerings (IPOs) listed on the Bombay Stock Exchange during June 1992–March 2001. The researchers found that underpricing in Indian IPO’s has been found to be 99.20%. The level of under-pricing is extremely high compared with the international evidence. The study also found that some of the important determinants of under-pricing are Age of the firm, listing delay of the IPO and the demand for the IPO. It was also found that in the long run, the Indian initial public offerings don’t tend to underperform.

Sahoo and Prabina (2010) in the research paper titled, “After Market Pricing Performance of Initial Public Offerings: Indian IPO Market 2002-2006” studies performance of 92 IPOs. The researchers have determined that the average level of under pricing of initial public offerings in India is to the extent of 46.55%. The level of under-pricing was obtained by comparing the listing day performance with the market index.

Nurwati A. Ahmad-Zaluki and Lim Boon Kect (2012) – “The investment performance of MESDAQ market initial public offerings(IPOs)” provided evidence on both the short-run and long-run investment performance of Malaysian initial public offering (IPO) companies that are listed on the Mesdaq market. The researchers studied about the factors that influence the performance of IPOs. The results of the study were in line with previous Malaysian studies. It was found that the raw returns and the market-adjusted initial returns of IPOs are extremely under-priced in the short-run. However, it was seen that the IPO companies were underperforming the market in the long run. In contrast to the results found in previous Malaysian studies using a subset of listed firms, the researchers’ findings concentrated on long-term success. Researchers determined that businesses in the technological sector that launched IPOs in the hot issue period and under-priced their IPOs did less well in the long term. The fad hypothesis of long-run under performance is confirmed by this observation. The results obtained also suggest that investors who buy shares of the IPO on the Mesdaq market make significant returns in the short-run. However, they do not fare well in the long-run. The research provides new information to investors in order to evaluate IPOs listed on bursa Malaysia.

Bansal &Khanna (2012) analyzed that there is significant difference between the magnitudes of level of underpricing of IPOs that priced through the book build with those priced through the fixed price option and IPOs price through book build are more underpriced than fix price option IPOs.

Bagga, Khurana & Singh (2012) analyzed that IPOs of January, 2001 to August, 2011, most of the stocks have generated listing profits whereas in long term most of the companies have underperformed compared to market returns. The researchers advised the investors the following 3 strategies while investing in an initial public offering. The first strategy is that the investors could sell all their shares on the listing day itself and thereby make listing gains in most cases. The second strategy is that the investors could book partial profit on the listing day and hold the remaining shares for a long term. This will help in reducing risk. The third strategy is that the investors could hold their shares for a period of more than 5 years. However, they should ensure that the company is fundamentally strong if they decide to invest for a long period.

Jotwani and Singh (2012) noted that subscription rate of the IPO plays major role only in short run. The sudy concluded that the investors may try to analyse the demand and supply for an IPO before deciding whether to invest or not. They can use the over subscription rate of IPO, before deciding whether to invest or not. It was found that the demand for the IPO has a significant impact on the performance in the short run

Puri H (2012) in his research entitled “An Empirical Investigation of Short-Run Performance of IPOs in India” analyzeded the short run market adjusted performance of 100 IPOs listed on National Stock Exchange (NSE) from the period April 2008 to March 2011(3 years). This study found that Indian IPO market provides positive abnormal return to investors on short-run basis (1st and 7th day). The researchers found that the IPO returns start decreasing at the end of 30th day and the IPO shows negative return. It was found that market adjusted average return of the IPO for the first, seventh and thirtieth trading day is 7.23%, 2.09%, and -8.58%. The researchers also used T-Statistic to determine the significance of the market adjusted returns. The researchers made use of the wealth relative model to analyze the short run performance of IPOs. This model also proved the same results that the returns start diminishing towards the end of the 30 th trading day. It was found that the wealth relative index values are 1.07, 1.02 and .91 for first, seventh and thirtieth trading day. The researchers presented the performance of IPOs on yearly basis. It was found that for the year 2009-10, IPO’s showed exceptional performance.

Ganesamoorthy, L., & Shankar, H. (2013) in their study entitled “The performance of initial public offerings based on their size: An empirical analysis of the Indian scenario” focused on the performance of Initial Public Offerings (IPOs) made by the Indian companies on the basis of the IPO size. For this analysis, the researchers used a sample of 219 Indian IPOs that were released during the 2001 to 2010 period. The research used the traditional approach of event study and an event window was built for a span of 75 days from the shares’ listing date. The researchers calculated the market-adjusted return by subtracting the market returns from the actual return of shares in order to eliminate market factors. The researchers classified the IPOs into 3 categories namely small, medium and large based on the size of the issues. It was found that large-size IPOs performed better compared to small and medium-size IPOs. The research also found that small-size IPOs were relatively overpriced compared to medium and large-size IPOs.

Batool K. Asiri and Aalaa J. Haji (2014) – “The determinants of IPO underpricing in the GCC countries” documented the phenomenon of underpricing initial public offerings (IPOs) for 194 firms that went public between 2000 and 2013 in the markets of the six gulf cooperation council (GCC) countries. The research was carried out to determine the factors that potentially influence abnormal returns on the listing day. The researchers have used several variables which have been previously evaluated like. The researchers also made use of various other variables and additional variables like seasonal affective disorder. The key findings of the study were that both the firm age and the size of the bid are negatively linked to the under-pricing stage. The study also indicated that there exists a relationship between financial and non-financial companies, and that there are many gaps which exist between insurance and banking firms. One of the significant results of the analysis was that it seemed that the discrepancy between the month of Ramadan and the month of the IPO was significant. The author had carried out the models during the financial crisis period and it was found that almost all appeared to be significant.

Leila B & Farshid A. (2014) –“Study of Factors Affecting the Initial Public Offering (IPO) Price of the Shares on the Tehran Stock Exchange.” The research was carried out to determine if the pricing of IPOs in Tehran Stock Exchange is less than actual. The researchers also study the different factors which affect pricing of IPOs on the Tehran Stock Exchange. To carry ou the study, a sample of 115 stock exchange companies which were listed between 2006 to 2012 was considered. The finding of the study was that the Price to Earnings ratio of a firm has a significant impact on the price changes of IPO’s. The ration had the highest impact on price of the IPO.

Shah S, Metha D (2015) – Initial performance of ipos in india: evidence from 2010-2014 studied listing day performance pertaining to 113 IPOs in India during January, 2010 to December, 2014, listed in National Stock Exchange (NSE) India. The researchers found that, on an average, most IPOs have a significant positive return on the first trading day. It was also found that the Market Adjusted Abnormal Returns (MAAR) of the IPO companies was 7.19%. The researchers observed that most IPOs are underpriced initially. They made use of t-test to verify the returns of the IPOs. The mean initial return of the IPOs was 7.19%. In order to analyse whether there is a link between the degree of underpricing of IPOs and other independent variables such as the issue price, the scale of the problem, over subscription and the returns from the market index, the researchers used the regression model. The findings obtained from the regression analysis showed that there was no important relationship except over subscription between the IPO’s degree of underpricing and the other independent variables. As the IPOs are underpriced during the initial days, the researcher recommends that investors should consider to invest a part of their capital in a new issue during the initial days.

Reddy K S (2015) in his article entitled “The aftermarket pricing performance of initial public offers: Insights from india” examined the underpricing of initial public offers (IPOs), which were announced by Indian firms for the period 2007 through 2009. The fact that well-developed capital markets are a function of the economic development of a nation and a reflection of its financial system motivated the report. The key findings of the analysis were that, in the short run, post-listing IPOs produce a good return. In the long run, however, the returns begin to plunge and they become negative. The highest returns from IPOs were observed during the first week of post-listing.

Jampala, R. C., Lakshmi, P. A., & Dokku, S. R. (2016) – “A Study on Factors Influencing the Initial Public Offerings (IPO) in the Bombay Stock Exchange (BSE), India: During 2007-2013” This study has examined the IPO performance in India from 2007 to 2013. The major finding of the study was that underpricing exists in the 1 st day of trading. However, the researcher has observed that the degree of underpricing has significantly decreased compared to the previous studies. The research also found that the issue variables influence the initial public offerings. It is observed that the face value of shares and level of over subscription influence the listing day performance of IPOs in a major way. After 3 years from listing, it is seen that IPOs are underperformed by 29.09%. The researcher found that some of the factors impacting the IPO performance in the long term are the market capitalization of the company, issue share premium, face value of the shares, issue price of the IPO, and the number of times the IPO is over-subscribed are some of the factors affecting IPO success in the long run. The researchers considered a sample of 146 companies to identify the various factors influencing the Initial Public Offerings (IPO) in the Bombay Stock Exchange (BSE)

Poornima S, Haji A (2016) – “A study on the performance of initial public offering of companies listed in NSE, India & Gulf base GCC index.” The researcher analyzed the short-term performance of the companies in this analysis in order to explain the phenomenon of irregular returns as well as the long-term performance in order to evaluate the long-term performance of the IPOs. Between Jan 2013 and Dec 2014, the thesis was performed. The researchers considered a sample of nine companies listed in NSE for the study. The researchers found that IPO stocks are a good instrument for long term investment. In order to maximize their profits, they recommended that investors subscribe to the initial public offering or buy the shares from the primary market and retain them for a defined time in the secondary market.

Patel A (2016) – “Determinants of Listing Day Performance of IPOs: Study from Indian Equity Market” carried out a study based on listing day performance of 80 initial public offerings (IPOs) in India during January, 2011 to June, 2016, listed on National Stock Exchange (NSE), India. The researchers observed that on an average, the listing day returns of IPOs were positive. The investigator performed a sample t-test to check whether or not the average raw returns and the average market adjusted excess returns (MAER) are substantially below values. The researcher found that during the study period, the MAER of all samples IPOs was 14.01 percent and it was important at the 1 percent stage. The investigator concluded, therefore, that IPOs were substantially underpriced. The researcher also used the Multiple Regression model to examine the relationship between MAER and other independent variables such as the size of the problem, subscription question, listing delay, keeping of the business age and post problem promoters. It was found that there was no important association between MAER and the other independent variables such as the keeping of age and post problem promoters through the multiple regression study. It was also noticed that MAER showed a significant link with the size of the issue, over-subscription and delay in listing.

Ambilya. M et al (2016) in their paper entitled “A Study On Performance of IPOs under NSE from issue price to last trading price in the year 2013-2015”, studied the performance of IPO’S  listed in National Stock Exchange (NSE) during, 2013 to 2015. The study found that, on average, initial public offerings yield dramatically positive returns. The majority of investors were also found to invest in the IPO primarily on the basis of the company’s image and not on the basis of a fundamental analysis. It has also been found that most shareholders tend to buy at a lower cost. It is noted that the last trading price is often greater than the price provided by the IPO. The new trade price comes after the price offered in the analysis by the IPO.

Roopa P. (2016) investigated on introductory execution of Initial public offerings’ in India during 2015-2016 – Valuing Instruments is a significant choice before giving Initial public offerings. The study assumes that any initial public offerings in the stock market are an indispensable job in success and failure. One of the big developments Indian Capital Markets has seen in the past is the presentation of deals through the method of book building.The researchers considered in this paper the execution of 69 initial public offerings on the posting day either by Book Building technique for open initial public offerings or through fixed value strategy during the monetary year 2015-16.

Bhanu M et al. (2016) in their article entitled “Long-run performance of IPO market in India” examined the Long-run performance of initial public offerings (IPOs). The data was obtained for 31 IPOs from the period 2000 to 2003. Using SPSS Version 16, the researchers used the Logistic Regression Model to test the relationship between long-term IPO output and short-term company performance variables. The study reveals that long-term variables have no relationship or negative relationship with short-run variables. It has a positive relationship with some of the theory supporting the view that there should be small listing gains, moderate short-run gains and large long-run gains for IPO markets to be successful. Only then will the long-term growth of the IPO sector take place. But the true scenario is the opposite. Companies have listing earnings, short-run earnings, but they do not make long-term gains.

Dhamija, S., & Arora, R. K. (2017) in their article entitled “Determinants of long-run performance of initial public offerings: Evidence from India” studied the the long-run performance of 377 initial public offerings (IPOs) made by Indian companies during the period 2005–2015. The aim of the paper is to examine if, in the long run, Indian IPOs are underperforming or outperforming the large market and to identify the key determinants of their long-term success. The findings indicate that Indian IPOs outperform the general market, preceded in the long run by considerable under-performance initially. During 2005-2015, the IPOs listed on the main board yielded an average initial excess return (IERs) of about 22 percent. Negative IERs were, however, provided by 37 per cent of the IPOs. The IPOs underperformed the wide industry, producing an abnormal buy-and-hold return of 57.33 percent (BHAR) over 36 months following listing. Over 36 months holding time, just 38 out of 377 IPOs (10 percent) outperformed the benchmark index. The type of issuer (government-owned or private), lead manager credibility (LMP), promoter retention and the scale of the issue are the significant problem characteristics that affect the long-term success of IPOs in India.

Suri A, Hada B (2018) in their article entitled “Performance analysis of initial public offerings in India” examined the performance of 107 IPO’s in Indian stock market . The time period for the study was between the period 2011 to June 2017. The researchers verified the IPOs on the basis of two main performance metrics namely the over-subscription ratio of the IPO and the listing day gains generated by the IPO. The purpose of the study was to compare between January 2011-May 2014 and June 2014-June 2017 the performance of the IPOs. The study findings indicate that the performance of the IPOs launched between 2011 and May 2014 was substantially different from the performance of the IPOs launched between June 2014 and June 2017. It was also investigated that the amount of IPOs and the fund raised from them also varied significantly for the two years.

Tanted N, Mustafa S (2019) – “ A Study of Returns Between IPO Issue Price and Listing Day Price” (2019) conducted a study to identify the difference in returns between IPO offered price, Listing day opening price, closing price. The goal of the study was to assist investors to make an investment decision through the IPO or buy it directly from the secondary market. Data is collected for the review of all IPOs released over 10 years. The study concluded that the price offered by the IPO, the open-day listing price and the closing-day listing price did not vary statistically significantly. The mean value for the open price listing day was higher than the price provided by the IPO. For the listing day close price, the mean value was high compared to the listing day open price. For the listing day closing price, when the price offered by the IPO was high, the mean value was high.

Statement of problem

IPO’s are often seen as a speculative possibility to make exceptional gains on the listing day. There is, however, uncertainty about the effects of various determinants such as issue size, over subscription, age of business, holding of promoters post issue and various other fundamental factors on the success of the IPOs. There also exists confusion among investors whether to hold the stock for a short term or to sell it on listing day. If these problems are not addressed, investors may not be able to effectively analyze the stock while formulating an investment strategy.

Objectives of the study

The objectives of the study are:

• To analyse the performance of Indian IPOs in the short term.
• To determine the significance of abnormal return of the IPOs.
• To study the impact of over-subscription, profit after tax, promoters’ holdings,

  issue price and market returns on IPO performance.

Scope of the study

The scope of the study is limited to the IPO’s listed only in the National Stock Exchange (NSE), India.

H 0 = There is no association between IPOs performance and various determinants.

H 1 = There is significant association between IPOs performance and various determinants.

Research Methodology

Research design.

Descriptive research design is used to assess the efficiency of IPOs and the effects of different determinants such as issue size, over subscription, listing delay,age of the firm and post issue promoter’s holding on the performance of IPOs.

Period of study

The study covers a period from January 2018 to December, 2020.

Data Collection

This study was completely based on secondary data. The official website of NSE India is used to collect the list of IPOs during the study duration, the daily stock price and the data on the market index namely, nifty. The red herring prospectus issued by the company ois used to get details regarding the listing date, issue size, age of firm and Promoter’s holding. Over subscription and listing date data are collected from NSE website.

Sample Selection

The sample consists of all Indian companies which issue IPOs and listed on National Stock Exchange (NSE) during January 2018 to December 2020. The below table shows the number of IPOs which have been listed

Table 1 : Sample Details

Data Analysis & Interpretation

Short term returns.

The methodology for investigating the short-run performance of IPOs has been kept simple and is based on the methodology used by many of such past researchers.

Returns for first 22 trading day for stocks and market are calculated based on the below formulas.

The logarithmic returns for stock “i” at the end of the d th day is calculated as: 

R i,d is the return on “i” at the end of the d th day,

P 1 is the closing price of the stock i at the d th day

P 0 is its issue price

The logarithmic return on the market index (NIFTY 50) during the same time period is:

R m,d = Ln(I 1 ) – Ln(I 0 )

R m,d is the return on index at the end of the d th day,

I 1 is the closing S&P CNX Nifty value at the d th day and

I 0 is the closing S&P CNX Nifty value on the offering day of the stock

Interpretation

The above tables show the various statistics like mean return, minimum return, maximum return and standard deviation on the stock and index value for the first 22 trading days. It is observed that on an average, the stock return was 13.52%, ranging from -23.15% to 82.16% with standard deviation of 26.72% after first trading day. For the similar 1st trading day, Index return on average remains -0.0%, while it ranges from -20.31% to 6.25% with standard deviation of 3.72%. Therefore, we can conclude that the IPO outperforms the market on the first trading day.

It is observed that the highest returns are observed on the 3rd trading day. The average returns were 14.52%, ranging from -19.22% to 117.55% with standard deviation of 18.57%. For the similar 3 rd trading day, Index return on average is 0.09% and it ranges from -28.56% to 8.26% with standard deviation of 4.90%

On 5th trading day, it is seen that the average stock return were 13.59%, ranging from -20.65% to 98.66% with standard deviation of 28.83%. For the similar 5th trading day, Index return on average remains 0.30% and it ranges from -25.65% to 9.76% with standard deviation of 4.66%. Therefore, we can conclude that the IPOs continued to outperform the markets at the end of one week of listing.

On the 22 nd trading day, the stock return on average was 13.44%, ranging from -36.67% to 104.21% with standard deviation of 29.44% . For the similar 22 nd trading day, Index return on average remains 1.70%, while it ranges from -19.61% to 10.10% with standard deviation of 5.47%. This implies that there is a small decrease in the performance of the compared to the first and fifth trading day. The IPO under performs compared to the broader market.

Graphical Representation of mean IPO return and market return

Figure 1 : Graphical Representation of mean IPO return and market return

From the above graph, we can observe that the IPO’s outperform the markets in the short run. It is seen that the IPO deliver superior returns during the first three trading days. The highest returns are seen on the third trading day. Following the third trading day, there is a small fall in the returns of the IPO which could be due to profit booking of investors. The fall continues till the 6 th trading day. Following this the returns gradually start increasing again.

It is also observed that towards the end of the month, the returns start decreasing. On the last day of the month (22 nd trading day), the returns of the IPO are slightly lower compared to the first day returns.

Market-adjusted Short Run Performance & Wealth Relative Model

Using these average stock returns and the market returns, the market-adjusted short run performance for each IPO on d th day of trading is computed as:

MASRPi,d = { [ ( 1 + Ri,d ) / ( 1 + Rm,d )] – 1 }

This model measures the initial trading returns adjusted with the market returns. This sort of measurement has been commonly used in many past studies to measure the short run performance of IPOs with risk adjustment, assuming the systematic risk of the newly listed stock to be 1.

The average of market adjusted short run performance return for the d th trading day is represented in the formula by MASRPd, which is a performance index. It is actually the return in excess of the market return on investment divided equally among n new:

MASRPd = 1N ∑ MASRPi,d  

To test if the MASRP equals zero, the associated t statistic is computed:

t = (MASRPd) / (S/√N)

S is the standard deviation of MASRP,d across the companies and N is the no. of sample.

The wealth relative model has also been applied to measure the short run performance for group of IPOs.

WRd = (1+ 1/N ∑R i,d ) / (1+ 1/N ∑R m,d )

Where WRd is the Wealth Relative for the dth trading day

and n is the total number of IPOs in the sample.

A wealth relative score of more than one means that the IPOs has performed better than market during the period of study. Wealth relative index score less than one indicates poor performance in comparison to market.

Table 4 : Market-adjusted Short Run Performance & Wealth Relative Model

The above table shows the market adjusted initial returns, standard deviation and wealth relative index along with t-statistic. The market adjusted short run performance for the 1 st , 5 th and 22 nd day are 13.52%, 13.43% and 11.58% respectively which simply means that the abnormal returns are slightly falling near the end of the month. The similar result is being shown by the wealth relative index which is 1.14, 1.13 and 1.11 for respective days. The critical value of T at 95% confidence level is 2.009. It is observed that the calculated values for all the days are greater that the critical value. Hence, we can conclude that the returns are significant.

Graphical Representation of Market Adjusted Short Run Performance

Figure 2 : Graphical Representation of Market Adjusted Short Run Performance

From the above graph, we can observe that the market adjusted sort run performance of the IPO rises between the first and the third trading day. The performance is the highest on the 3 rd trading day.

Toward the end of the month, the market adjusted short run performance is falling which shows that the returns of the IPO in comparison to the market returns is slowly decreasing.

Calculation of Abnormal Returns

Abnormal return is the difference between the actual return of a security and the expected return . Abnormal returns are sometimes triggered by “events.” Events can include mergers , dividend announcements, company earning announcements, interest rate increases, lawsuits , etc. all of which can contribute to an abnormal return. Events in finance can typically be classified as information or occurrences that have not already been priced by the market .

The abnormal returns and cumulative abnormal returns are calculated using the below formulas.

From the above table, we can observe that there is significant abnormal returns delivered by the IPO on the first trading day. The mean abnormal returns on the first trading day is 11.09%. From the second day, the abnormal returns are negative. At the end of the 22 nd trading day, it is observed that the cumulative abnormal returns are approximately equal to zero.

The critical value of T at 95% confidence level is 2.009. It is observed that the calculated T value for mean abnormal return is greater that the critical value for the first day only. Therefore, only the first day Mean Abnormal Return are significant.

• The T statistic of the mean cumulative abnormal returns is greater than the critical T Value for the first 19 trading days. Therefore, only the first 19 days Mean Cumulative Abnormal Returns are significant.

Graphical Representation of Cumulative Abnormal Returns

Figure 3 : Graphical Representation of Cumulative Abnormal Returns

From the above graph, we can observe that the mean cumulative abnormal returns are highest on the first trading day. The cumulative abnormal returns have been subsequently falling. At the end of the month, the cumulative abnormal returns are approximately equal to zero.   

Determinants of IPO performance

Multiple regression analysis has been applied to examine the effect of issue price, over subscription, profit after tax, post IPO promoters’ holdings and the market returns on the IPO returns at the end of 22 trading days. This technique helps in identifying the extent and direction of relationship between the dependent variable and several independent variables. The R square and the adjusted R square generated by it indicates the proportion of variation in the dependent variable explained by the independent variables

Regression Equation:

Stock Returns = Constant + β1 (ln_IP) + β2 (ln_OS) + β3(ln_PAT) + β4 (ln_PH) + β5 (Market Returns)

ln_IP = Natural Logarithm of the issue price

ln_OS = Natural Logarithm of the over subscription

ln_PAT = Natural Logarithm of the profit after tax

ln_PH = Natural Logarithm of the promoters’ holdings

Market Returns = Mean Market returns

Figure 4 : Results of Regression Analysis

From the probability values, it is observed that except over subscription (P =0.0000), all the other factors like Issue Price (P = 0.2225), Profit after tax (P= 0.2391), promoters holdings (P= 0.3340) and market returns (0.0632) have no impact on IPO returns.

For 1 unit increase in the over subscription causes 0.102-unit increase in the IPO returns. Looking at the Adjusted R squared value i.e. 0.406712, we can say that around 40.67% variations can be explained from all independent variables.

F Statistics probability i.e. 0.000017 also shows that when independent variables are taken

simultaneously, they are equal to zero.

• Based on the daily IPO returns, the study found that the IPOs outperform the markets on the first trading day (listing gain). The average stock return on the first trading day were 52%, ranging from -23.15% to 82.16% with standard deviation of 26.72%. For the similar 1st trading day, Index return on average remains -0.0%, while it ranges from -20.31% to 6.25% with standard deviation of 3.72%.
• It was found that the IPOs offered the highest returns on the third trading day. The average returns were 14.52%, ranging from -22% to 117.55% with standard deviation of 18.57%. For the similar 3 rd trading day, Index return on average is 0.09% and it ranges from -28.56% to 8.26% with standard deviation of 4.90%.
• The research found that there was a small fall in the IPO returns after the third trading day. At the end of the month, the IPO returns was slightly lesser compared to the returns on the listing day.
• It is found that the market adjusted short run performance starts falling from the 3 rd trading day. This indicated that the returns of the IPO in comparison to the market returns is slowly decreasing, which is due to the decrease in the abnormal returns. From the ‘t’ test, it is found that the market adjusted short run performance is significant.
• The wealth model signified that the IPOs have performed better than market during the first month from listing.
• It is found that the abnormal returns are highest on the first trading day. The cumulative abnormal returns have been subsequently falling. At the end of the month, the cumulative abnormal returns are approximately equal to zero
• It is found that the critical value of ‘t’ at 95% confidence level is 2.009. It is observed that the calculated ‘t’ value for mean abnormal return is greater that the critical value for the first day only. Therefore, only the first day Mean Abnormal Return are significant.
• From the results of the regression analysis, it is found that only over subscription impacts the IPO performance. For 1 unit increase in the over subscription causes 0.102 unit increase in the IPO returns. The other factors namely, issue price, Profit after Tax, market returns and promoters holdings do not influence IPO returns.

From the study we can conclude that an initial public offering is a great opportunity for investors to earn good profits in the short run. The investors also use this as a speculative opportunity and sell off their shares on the listing day. The abnormal returns are also highest on the listing day after which the gradually decrease. One of the major factors an investor should consider while applying for an IPO is the over subscription as it has a significant impact on the performance of the IPO.

Scope for Further Studies

The scope for further research:

• This study is focused on the short run performance of IPOs. A study can be conducted on the performance of IPOs in the long run and the factors that influence the long run              
• A study can be conducted to understand the factors which influence the customers to       invest in an IPO and the various factors that are considered while evaluating the IPO.

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The aftermarket performance of initial public offerings: New evidence from an emerging market

Dilesha nawadali rathnayake.

1 School of Economics, Shandong University of Technology, Zibo, PR of China

Zhixin Zhang

2 Business Achool, Shandong University of Technology, Zibo, PR of China

Pierre Axel Louembé

3 School of Accounting, Dongbei University of Finance & Economics, Dalian, PR of China

Associated Data

The data underlying the results presented in the study are available from the Colombo Stock Exchange official website at: https://www.cse.lk/pages/listed-company/listedcompany.component.html?status=1 after paying the subscription fees for a Platinum package." Further, All relevant data are available with the manuscript Supporting Information files.

This paper presents new updated evidence on the initial public offering (IPO) aftermarket performance for 144 public listed firms on the Colombo Stock Exchange from 1991 to 2017. We found that average aftermarket returns are always lower than 1%. On average, buy and hold abnormal returns are negative in a short period, and abnormal returns gradually become positive over a longer period (12.46% in 3 years). Further, aftermarket returns are positively related to investor sentiment and the annual volume of listings while being negatively related to initial returns, which is consistent with the divergence of opinion hypothesis. We suggest that investors should hold their subscriptions of IPO shares for a prolonged time, usually exceeding two years, as the dynamic of shares rewards the investors with positive abnormal returns in the long run.

Introduction

Share trading has been a part of Sri Lanka’s history since 1896, but it is only a few years later that an official Stock exchange was created, herein Colombo Stock Exchange (CSE) which has remained the main Stock market in the country. CSE is endowed with a fully automated trading platform and 20 business sectors listed. CSE witnessed an unprecedented expansion in 2009 to become the world’s best performing market of 2010, with a growth of 111.14%. Mainly due to the sound political improvements instigated since 2009 and a peaceful environment after the post-war period, CSE has considerably evolved and deserved additional attention from scholars and practitioners of finance. In fact, with a market capitalization of USD 16.07 billion in December 2018 and 202 IPOs launched between 1991 and 2017, the performance of such a developing market is worth being assessed.

Although the literature on IPO performance is rapidly growing, still there is a variety of results due to the different academic viewpoints applied, selection of determinants, measurement of performance and the contextual nature of individual firms. Despite the rather abundant empirical literature on IPO performance, the previous studies lead to a broad, diverse and multilateral set of findings due to the theoretical perspectives being adopted (determinants, performance measures, contextual nature of individual firms). Moreover, institutional, legal frameworks in emerging economies are not advanced compared to developed nations. Also, most research stressing the IPO performance are conducted in developed economies and large stock markets when emerging economies show substantial differences regarding economic growth, business environments, income levels, and management practices. Only a few studies evaluate the behavior of IPOs in developing nations such as Sri Lanka, which operate in challenging environments (civil war, political instabilities, Asian crisis, Tsunami devastation) and so far, manage to perform strongly in the corporate sector. Especially based on the challenging economic and political atmosphere where Sri Lankan companies perform comparatively strongly, research on the capital market is expected to give exciting outcomes and fill the existing gap in knowledge of the association between IPO performance in the long run.

Initial Public Offering (IPO) aftermarket performance is broadly documented and has been a subject of attention among scholars for decades [ 1 , 2 ]. Peter [ 3 ] investigated aftermarket returns of Sri Lankan IPOs in terms of privatized and non-privatized offerings using the market-adjusted buy and hold returns (BHRs). IPOs are initially underpriced, and those excess returns tend to decline by the end of three years. In contrast, privatized IPOs contribute higher returns than non-privatized IPOs in the Colombo Stock Exchange (CSE). The number of IPOs examined by Peter [ 3 ] was relatively small. Ediriwickrama and Azeez [ 4 ] studied aftermarket IPO underperformance in the CSE with calendar time techniques from 2000 to 2012 and identified several factor models to describe the return variation of IPO stocks in CSE. None of the studies have considered the determinants of aftermarket performance. This is the first study considering the wider time span and twelve determinants of IPO aftermarket performance in Sri Lanka.

This study presents new findings on IPO aftermarket performance for 144 Sri Lankan IPOs that went public from January 1991 to December 2017. We measured the IPO aftermarket performance up to 36 trading months (720 trading days), including the listing day returns. Further, this study focuses on the importance of IPO issue characteristics at the time of going public to find interpretations for the IPO aftermarket performance. The key goal of this research paper is to present updated evidence by examining the amount of IPO aftermarket returns in CSE, focusing on the market-adjusted abnormal returns. This study contributes to the IPO literature by presenting new findings of IPO aftermarket performance in the CSE, using an inclusive sample and a complete analysis of IPO returns. Thus, we carry out critical analysis to determine whether our results about the IPO aftermarket performances in Sri Lanka are similar to those found in previous literature for other emerging countries. Generally, there are three ways in which the study contributes to the current literature. First, the most recent dataset is considered to uncover aftermarket performance. Previous studies have covered a shorter period and smaller samples. Second, both market-adjusted cumulative average returns (CAARs) and average market-adjusted BHRs have been employed in this study to assess the aftermarket performance of IPOs. The outcomes deliver significant information and understanding for stakeholders to invest in IPOs. Based on our results, we recommend that stakeholders should be careful while analyzing IPO returns in the long run.

This paper is ordered into six headings. Section 2 explains the literature review, and section 3 summarizes the data and research methodology. Section 4 includes the empirical results and analysis. Last, section 5 presents the conclusions of the research.

Literature review

The existing studies have presented numerous explanations for the behaviour of IPO aftermarket performance. However, there is a lack of observable variables that can describe aftermarket performance. To explore the determining factors of IPO aftermarket performance, several theories are considered in this study.

The divergence of opinion hypothesis suggests that the uncertainty about an IPO can attract overvaluation on a listing day, followed by underperformance in the long run. Miller [ 5 ] proposed that at first, investors lean towards being over-optimistic about the IPO value, which causes initial under-pricing and that later, as the differences of opinions reduce when information flows increase with time, the price of IPOs diminishes to the intrinsic value, producing low aftermarket performance. Gao et al. [ 6 ] provided further evidence for Miller’s [ 5 ] argument. The study which is based on 4,057 IPOs found that divergence of opinion, proxied by short-term stock return volatility (first 25 trading days after issuance), is negatively related to IPO long-term abnormal returns. In addition, the authors highlight the effect of market regulatory settings on assets early pricing. That is, the regulatory induced pricing bias and short-selling constraints could lead to inflated initial aftermarket IPO prices that autocorrect in the long run, resulting in aftermarket underperformance. As Short-selling is typically forbidden in CSM, investment opinion divergence, proxied by market volatility (first 40 trading days after IPO) throughout this investigation, shall also bear the negative sign reported in previous works. Following previous studies [ 6 , 7 ], ex-ante uncertainty is used as a proxy to analyze the relationship between the divergence of opinion and IPO aftermarket performance in CSE. Greater values of ex-ante uncertainty indicate a greater divergence of opinion for the IPOs. As such, the hypothesis predicts a positive relationship between the ex-ante uncertainty and the aftermarket performance.

The impresario hypothesis asserts that the IPO market is exposed to manipulations due to the presence of the investment banks, which are comparable to the ‘impresarios’ that would voluntarily under-price the new shares with the aim of attracting more investors to the securities’ markets Shiller [ 8 ]. Interestingly, this hypothesis points out the reliance on underwriters for certifying the quality of the new issue. Similarly, the impresario hypothesis is in line with the overreaction hypothesis [ 9 ]. The deliberate under-pricing of shares generates the appearance of an excess demand, which triggers investors’ optimism and channels an overreaction toward the stock. The misevaluation of shares in initial IPO markets will autocorrect over the medium run and the long run when extra information becomes accessible to the general public [ 10 ]. Both hypotheses predict IPO aftermarket performance to be negatively associated with the initial under-pricing. Conversely, signalling theory suggests that IPO under-pricing is positively related to IPO aftermarket performance in the long run [ 11 ]. During hot issue periods, high quality firms will issue IPOs and under-price the IPO shares to pass the signal of good quality to win the confidence of investors [ 12 ]. Loughran and Ritter [ 1 ] and Ritter [ 2 ] claimed that a firm that goes public in a hot issue period usually generates a high return in the short run and low returns in the long run.

Many studies have suggested that the initial returns and aftermarket performance have a negative association, in line with the overreaction hypothesis [ 2 , 8 , 13 ]. Further, Ritter [ 2 ] found that IPO aftermarket underperformance usually continues up to 3–5 years after listing. Nevertheless, the degree of IPO aftermarket underperformance is associated with whether the IPOs are either underpriced or overpriced on the first trading day. If the IPOs are underpriced on the first trading day, then initial returns would either not be related or be positively related to IPO aftermarket performance. However, if IPOs are overpriced on the initial trading day, then the initial returns will be negatively related to aftermarket performance because the initial overpricing will be corrected gradually by the post-IPO market. Subsequently, it is expected that IPOs with greater under-pricing will perform worse in the long run [ 8 ]. Following Chi and Padgett [ 14 ] and Rathnayake et al. [ 15 ] the raw initial returns (IR) and the market-adjusted abnormal return (MAAR) for each IPO on the first day of trading are calculated as Eqs 1 and 2 , respectively.

Where P i1 = the closing price on the first trading day and P i0 = the IPO offer price of the i th stock; IR i1 = the initial returns of the first trading day; Rm 1 = the first trading day market return using the Rm 1 = [(Rm 1 -Rm 0 )/ Rm 0 ] formula; Rm 1 = the closing market index value on the first trading day of the i th stock; and Rm 0 = the closing market index value on the offering day of the stock.

Older firms perform better than are younger firms, as young firms generally have more ex-ante risk than do mature firms and mature firms have less information asymmetry with investors [ 2 , 16 , 17 ]. Thus, a positive relationship between firm age and aftermarket performance is expected. However, Brau, Couch, and Sutton [ 18 ] reported an insignificant negative relationship between issuer age and the long-term performance of IPOs. Belghitar and Dixon [ 16 ] and Ritter [ 2 ] documented a positive relationship between firm size and IPO aftermarket performance, as have other researchers who have used offer size as a proxy for ex-ante uncertainty [ 19 – 22 ]. Based on the divergence of opinion we expect a positive relationship between the offer size and aftermarket performance of IPOs. Board type is included in the study as a dummy variable, and we expect a positive relationship between Main Board listed companies and IPO long-term performance. Ritter [ 2 ], in the USA, and Levis [ 23 ], in the UK, for Main Board listings, found that IPOs with small size issues perform poorly in the long run. Following previous evidence, a positive coefficient is expected for Main Board listings in CSE. Following Thomadakis, Nounis and Gounopoulos [ 22 ], who found a significant negative relationship between IPO offer price and long-term market performance, we expected IPO price to be negatively related to aftermarket performance. Recently, Bhabra and Pettway [ 17 ] found a significant negative relationship, whereas while Mumtaz and Ahmed [ 24 ] found a positive but insignificant relationship, between long-term stock returns and the market volatility variable. We have computed market volatility as “the standard deviation of daily market returns over the first 40 trading days after the closing date of subscription” [ 25 ], and a negative relationship is expected.

We have included the hot dummy variable, which takes the value of 1 for the hot years, and 0 otherwise, to differentiate between hot and cold IPOs. Following the windows of opportunity hypothesis, a negative post-issue IPO performance [ 2 , 26 ] is expected. However, a positive relationship between the IPO volume in the market and aftermarket performance has been found by several prior studies [ 27 , 28 ].

Investor’s sentiment is found to be positively correlated to the IPO performance on the first trading day, and the observed share subsequently underperforms over the long run [ 10 , 29 ]. However, Khan, Ramakrishnan, Haq, Ahmad, and Alim [ 30 ], and Dimovski and Brooks [ 31 ] illustrated a significant positive relationship between market sentiment and aftermarket returns in a sample of Malaysian firms. Therefore, we predict that sentiment and aftermarket performance are negatively related. Nevertheless, Perotti and Oijen [ 32 ], and Rizwan and Khan [ 33 ] reported significant positive aftermarket returns of privatization IPOs in the long run. Thus, we expect a positive relationship between these two variables. IPO performance may differ significantly across the industries [ 2 , 19 , 27 ]. We include three industry dummies to control for the industry effect.

Methodology

Measures of aftermarket performance.

The event–time portfolio approach method is used in this study to measure the abnormal aftermarket returns of IPO firms [ 14 , 19 , 34 ] by calculating CAARs and BHRs for 36 months following the first trading day. Initially, we calculate the daily stock returns and daily market returns. Following Allen et al. [ 27 ], the raw return for each firm, R i , is calculated as

where P it is the closing price of an IPO on a particular trading day, and (t-1 ) is the previous trading day. Similarly, for the market return, R mt , the return is calculated from the differences in the ASPI market index values for the same time interval as above on a firm basis.

Then, the market-adjusted return for stock i in the t th trading day is defined as

where r it is the return for stock, i in the t th trading day and r mt is the market return index during the corresponding day.

Following Ritter [ 2 ] the aftermarket period returns for 36 months are calculated after converting daily data into monthly data by grouping 720 days into 36 months, assuming that there are 20 trading days in each trading month. The average market-adjusted return (AAR) on a sample of n stocks for the T th event month is the equally weighted arithmetic average of the market-adjusted returns for each trading month, which is calculated as

The CAARs from trading month 1 to trading month T is the summation of the AARs ( AAR T ). In particular, the CAAR from event month q to event month s is the summation of AAR T over various intervals during the 36-month aftermarket period:

The calculation of t-statistics for the AR T series are as follows,

where n T is the number of firms trading in event month T, and sd T is the cross-sectional Standard Deviation for event month T.

The conventional t-statistic (8) is used to test the statistical significance of the CAARs [ 2 ].

where var is the average of the cross-sectional variations over T months of the AR i , T , , and cov is the first-order auto-covariance of the AR T series, which is calculated by the correlation coefficient * cross-sectional variance.

BHRs are calculated using daily returns from the beginning of the holding period until either the end of the holding period or the delisting date, whichever is earlier [ 1 , 2 ]. Following Ritter [ 2 ], we excluded the initial trading day from BHR calculations

where T is the trading month, r it is the raw return on firm i in the trading day t , and T is the trading months (1–36).

Therefore, the market adjusted BHR [ 34 ] is defined as

where T is the trading month, r it is the raw return for stock i in the t th trading day, and r mt is the return on the market during the corresponding period.

The average BHR for the period T , denoted as BHR iT , is the arithmetic mean abnormal return on all IPOs in the sample of size n :

where the BHR for stock i in the t th trading day, n, refers to the number of observations.

A positive value of BHR shows that IPOs outperform in the considered period, and a negative value of BHR shows that IPOs underperform in the same period.

Empirical m ethodology

The sample data for this study consist of 26 years of daily observations (total 97,125) from 1991 to 2017. Daily stock prices and market returns, were collected from the CSE data bank ( https://www.cse.lk/pages/listed-company/listedcompany.component.html?status=1 ), after paying the subscription fees for Platinum package. While firm-level data extracted from company annual reports, and the IPO prospectus of each firm. The sample is 144 IPO issues, which is more than 70% of the total of 200 IPOs, including a total of 11 delisted firms within 36 trading months from the first trading date.

We first analyze the aftermarket returns in calendar years and on an industry basis. Then, we use cross-sectional analyses to identify the determinants of IPO aftermarket performance, followed by multiple regression analyses at the final stage. The selection of explanatory variables is based on the previous studies.

The multiple regressions used are:

where the dependent variables are the BHR i for 20, 60, 120, 180, 240, 480, and 720 trading days; AGE denotes the firm age from its legal registration; SIZE denotes the gross amount of IPO proceeds; PRI represents the issue price of an IPO in Sri Lankan Rupees; SENT denotes the investor sentiment; VOL denotes the annual volume of IPO stock listings in the CSE; MVL refers to the standard deviation of daily market returns for the first 30 trading days; HOT denotes the hot-period issues; PRV denotes the privatization issues; BRD denotes the listed board types; and IND indicates three dummies for the main industries. The detailed descriptions and summary of variables are shown in Table 1 .

Empirical results

Aftermarket performance measured by aars and bhrs.

Table 2 shows that the AARs and CAARs are always lower than 1% for the first 36 months after the listing day. The AARs vary between -0.15% and 0.15%. The CAARs for 144 IPOs are 0.54% over 36 months after listing. Furthermore, CAARs are all negative up to the twenty-sixth trading month and subsequently show positive returns. However, the t-statistics are not statistically significant. Moreover, both BHRs and CAARs are negative up to the twelfth trading month, and after that BHRs show positive returns, whereas CAARs show positive returns at the three-year holding period only ( Table 1 ). On a daily basis, there are many negative returns, so CAARs are lower than BHRs. BHRs are negative in the short run, and during the long run IPOs outperform them with positive BHRs. In particular, over three years, the average BHRs are 12.46% for the sample. However, skewness adjusted t-statistics are not statistically significant.

This table indicates the average monthly market-adjusted returns (AARs), and cumulative average monthly market-adjusted returns (CAARs) for the 36 trading months of IPOs. Market-adjusted buy-and-hold returns ( BHR i ) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively.

Aftermarket performance categorized by initial returns

Table 3 reveals a clear relationship between the initial returns and the aftermarket returns for both the short run and the long run. BHR20–BHR120 are negative in the short run and gradually give positive returns in the long run. Initial returns in the highest quintile ( MAAR/IR ≥ 120) have the worse BHRs. Nevertheless, in the short run, BHR20–BHR120 mostly appear to be negatively related to the IPO under-pricing. In contrast, in the long run, BHR240–BHR720 perform well for the lower initial return quintiles, whereas the higher initial returns quintile always has negative BHRs. When IPOs are initially either overpriced or underpriced, aftermarket IPO returns also underperform in the short run and then perform well in the market in the long run by generating positive BHRs and a similar pattern for both IR and MAAR . The results show that there is a considerable difference when initial IPOs are overpriced and that IPOs are more outperformed/underperformed in the aftermarket performance. However, between BHRs, only BHR720 returns have a significant difference at the 5% level.

This table shows the aftermaret performnce categorized by initial returns. Market-adjusted buy-and-hold returns ( BHR ) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively. IR refers to the initial returns and MAAR refers to market adjusted abnormal returns. Sample t-statistics to test the difference between categories and the overall average returns are calculated. Two-tails sample t-statistics are used to test the difference in means (assuming unequal variances). ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

Aftermarket performance categorized by individual measures

The complete breakdown of aftermarket returns considering different measures related to aftermarket performance are shown separately in Table 4 . The IPOs of firms aged 1–4 years have lower BHRs than returns of IPOs in 5–9 years in operation. The results specify that the aftermarket returns remain highest for the firms aged 10–19 years and tend to have positive returns with mature IPOs after one year. Firms aged more than 20 years have the worst performance in the short run, and this continues up to BHR480 . Interestingly, the positive BHRs recorded by firms aged 10–19 years are significant at the 10% level. Furthermore, following Loughran et al. [ 1 ] and Rathnayake et al. [ 15 ] firms aged less than 10 years are classified as young. Young vs. old illustrates a tendency for the age to be negatively related to the BHRs, i.e., younger firms underperform for BHR20–BHR120 and then perform well for BHR240–BHR720 .

This table shows the aftermarket performnace calculatons based on the individual measures. Market-adjusted buy-and-hold returns (BHRs) are calculated for six periods, namely BHR20 to BHR720 , considering 20, 60, 120, 240, 480, and 720 trading days, respectively. AGE denotes the history of the firm from its incorporation and classifies issues up to Rs. 200 million as being small and those above that figure as being large; SIZE denotes the gross proceeds from the IPO and classifies up to Rs. 200 million as being small and above Rs. 200 million as being large. Rs. is Sri Lankan Rupees; BRD denotes the listed board types; PRI denotes the offer price of the IPO; MVL denotes the standard deviation of the daily ASPI for the first 40 trading days prior to the IPO issue; VOL denotes the annual volume of listings in the stock market, and IPOs are categorized into four equal groups based on the number of IPOs went to the public annually; SENT is a proxy for investor sentiment; HOT denotes the hot-period issues and cold-period issues, respectively. Sample t-statistics are used to test the difference between categories, and the overall average BHR s are calculated. Two-tailed sample t-statistics are used to test the difference in mean BHR s (assuming unequal variances). ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.

SIZE reveals the aftermarket returns grouped by the size of the IPO issue, and IPOs are separated into three subgroups with nearly equivalent numbers of IPOs. Our results show that in the long run, smaller issues perform better than do larger issues. Moreover, issues up to Rs. 200 million are categorized as small and those above this figure are categorized as large to investigate the size effect. The small vs. large category illustrates that small issues tend to outperform, except BHR60 returns, whereas large issues underperform all over the periods. The differences in the long run, including for BHR240 are significant at 5%.

The results show that the aftermarket returns of the Main Board listed firms were positive compared to those of the Secondary Board listed firms. BHR480 returns show poor performance for both Main and Secondary listed boards. Conversely, the BHR720 returns for three years show positive values. The long-term return differences between the two different boards are statistically significant up to BHR240 , whereas the BHR480 and BHR720 return differences are not significant. Table 4 shows that two subgroups where the IPO shares were priced either lower than or equal to Rs. 20 performed poorly in the long run.

We divided the sample into equal four subgroups with an equivalent number of observations of 36 firms in each subgroup based on MVL values. When the MVL is high ( MVL ≥116), BHRs are always negative. The other three subgroups tend to show lower aftermarket returns in the short run, and the returns increase gradually with the passage of trading time and end up being positive. Moreover, the results show that 28≤ MVL < 64 subgroup records outperformed stocks continuously throughout the three years, even though values were insignificant. VOL indicates the four equal-sized subgroups grounded on the number of IPOs that went to the public annually. The level of underperformance remains highest for the 14–15 issues that are significant at 5% and tends to decrease when the IPO volume increases. BHRs are positive when the volume is between 6–10, whereas the returns of the other three subgroups do not show a clear pattern.

Furthermore, in the short run, IPOs underperform in both negative SENT and positive SENT in the market condition. BHRs perform worse in the positive SENT than in the negative SENT . During BHR480 and BHR720 , performance shows positive returns for IPOs issued at the time of negative SENT and returns show an increasing trend over the long-term for the negative SENT category. Even though the differences between mean returns in the two groups are statistically insignificant, the findings reveal a negative relationship between positive SENT and long-term IPO performance. Privatization issues are likely to perform better than conventional issues in the long run, up to two years. Privatized IPO issues show a trend of gradually increasing performance during the short time horizon and produce maximum returns during the first trading year of stocks. Conversely, conventional issues performing worse during the first year of trading and stars showing positive returns after the second year. The differences in the BHR20–BHR240 during the first trading year after the IPO issue are statistically significant at the 5% level.

Furthermore, following Rathnayake et al. [ 15 ], Table 4 shows that the BHRs are segmented by hot and cold year issues. According to the results, hot issue period IPOs perform better in the long run than do cold year IPO issues. Over the short-term, both hot issue and cold issue IPOs show negative abnormal returns, with hot issues still performing better than do cold issues. The difference between the two is significant at the 5% level in the first trading month. Long-term hot issues perform well and generate positive abnormal returns throughout BHR240–BHR720 , with a positive trend of increasing returns over longer periods.

IPO performance categorized by industry

The plantation industry has the highest returns BHR20–BHR120 in the short run, and those returns are significantly different from the overall average at the 5% level ( Table 5 ). Interestingly throughout the three years, the plantation industry is the only industry that performs well and generates positive BHRs continuously. Health care, power and energy, services, and trading sector IPOs always underperform in the long run. The underperformance of the power and energy industry differs sharply from the average returns of the sample, and the difference is significant at the 1% level for less than twelve trading months. Interestingly, four industries the beverage, food and tobacco sector, the footwear and textiles sector, the hotels and travel sector, and the manufacturing sector show a similar tendency of BHRs that underperform in the short run and outperform in the long run.

This table gives the sample distribution by the industry; the number of firms and the average aftermarket returns. Market-adjusted buy-and-hold returns (BHR i ) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively. Two-tails sample t-statistics are used to test the difference in the average BHR s in each industry and the overall average BHR s in the sample (assuming unequal variances). ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

Multiple regression analysis

First, the OLS assumptions are tested before running the multiple regressions. All the non-dummy variables are normally distributed ( Table 6 ). All the non-dummy variables are stationary at the level according to the Augmented Dickey-Fuller (ADF) unit root test results, which are given in Table 7 . As illustrated in the correlation matrix ( Table 8 ), independent variables do not appear to be substitutes of each other since the correlation between variables is less than 0.5. Only IR and MAAR are 94% positively correlated, but we do not consider IR and MAAR in the same regression model.

Note: Shapiro-Wilk Normality test statistic values are recorded in the table. Market-adjusted buy-and-hold returns (BHR i ) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively. IR denotes the initial returns; MAAR denotes the market adjusted abnormal return; AGE denotes the history of the firm from its incorporation; SIZE denotes the gross proceeds from the IPO; PRC denotes the issue price of an IPO in Sri Lankan Rupees; SENT is a proxy for investor sentiment; VOL denotes the annual volume of listings in the stock market; MVL refers to the standard deviation of daily market returns for the first 30 trading days after the IPO; HOT denotes the hot-period issues; PRIV denotes the privatization issues; BRD denotes the listed board types; and HTL, PLNT, and BNK are three dummies for the hotel, plantation, and banking industries, respectively. ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

Note: Augmented Dickey-Fuller test statistic values are recorded in the table. Market-adjusted buy-and-hold returns (BHR i ) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively. IR denotes the initial returns; MAAR denotes the market adjusted abnormal return; AGE denotes the history of the firm from its incorporation; SIZE denotes the gross proceeds from the IPO; PRC denotes the issue price of an IPO in Sri Lankan Rupees; SENT is a proxy for investor sentiment; VOL denotes the annual volume of listings in the stock market; MVL refers to the standard deviation of daily market returns for the first 30 trading days after the IPO; HOT denotes the hot-period issues; PRIV denotes the privatization issues; BRD denotes the listed board types; and HTL, PLNT, and BNK are three dummies for the hotel, plantation, and banking industries, respectively. ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

Note: This table presents the Pearson correlation coefficients for the variables considered in the study. IR denotes the initial returns; MAAR denotes the market adjusted abnormal return; AGE denotes the history of the firm from its incorporation; SIZE denotes the gross proceeds from the IPO; PRC denotes the issue price of an IPO in Sri Lankan Rupees; SENT is a proxy for investor sentiment; VOL denotes the annual volume of listings in the stock market; MVL refers to the standard deviation of daily market returns for the first 30 trading days after the IPO; HOT denotes the hot-period issues; PRIV denotes the privatization issues; BRD denotes the listed board types; and HTL, PLNT, and BNK are three dummies for the hotel, plantation, and banking industries, respectively. ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

Table 9 shows OLS results for the aftermarket returns of six dependent variables, BHR20–BHR720 . We used Eqs 12 and 13 for each BHR, considering IR and MAAR , respectively. The multiple regression models explain approximately between 10%–22% of the overall variations of IPO aftermarket performance in the considered sample, which is measured by R 2 . According to our results, the BHR20 , BHR120 , BHR240 , and BHR720 regression models have significant F-statistic values.

This table shows the regression results. Market-adjusted buy-and-hold returns (BHR i ) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively. IR denotes the initial returns; MAAR denotes the market adjusted abnormal return; AGE denotes the history of the firm from its incorporation; SIZE denotes the gross proceeds from the IPO; PRC denotes the issue price of an IPO in Sri Lankan Rupees; SENT is a proxy for investor sentiment; VOL denotes the annual volume of listings in the stock market; MVL refers to the standard deviation of daily market returns for the first 30 trading days after the IPO; HOT denotes the hot-period issues; PRIV denotes the privatization issues; BRD denotes the listed board types; and HTL, PLNT, and BNK are three dummies for the hotel, plantation, and banking industries, respectively. ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

IR and MAAR have a negative relationship with BHR20–BHR720 throughout all the periods. Even the short-term relationship is insignificant, and in the long run there is a significant relationship with BHRs. Our results are in line with the divergence of opinion hypothesis [ 2 , 10 , 13 ]. In the short run, the lnAGE coefficient has a negative sign, and it is statistically insignificant. For the BHR720 period, age and aftermarket returns have a significant positive relationship, which contradicts the previous findings [ 2 , 17 , 35 ] and the fundamentals of risk–return theory. The coefficient of the lnSIZE has a negative relationship with BHRs , and in the long run, including the BHR480 and BHR720 relationship, is significant at the 5% level, as supported by several studies [ 17 , 27 ].

The signs of the two BRD and lnPRI variables are not constant during the sample periods. Although the estimated coefficient on BRD has a positive sign in the short run, it is statistically significant at BHR60 and BHR120 aftermarket returns. BRD has an insignificant negative relationship with BHRs in the long run. lnPRI shows a significant negative relationship with BHR s in the short run and a positive relationship in the long run. MVL coefficient values are always negative and very low. Interestingly, BHR20 and BHR720 coefficients for MVL are statistically significant, thus supporting the hypothesis and previous studies [ 6 , 17 , 25 ]. Further, Wald test results indicate that five coefficients of ex-ante uncertainty are simultaneously equal to zero in all the models, and the results are not supported by the ex-ante uncertainty hypothesis. OLS results show an insignificant positive relationship between lnVOL and BHR20–BHR720 throughout the all periods, which is similar to the findings of Allen et al. [ 27 ] and Hensler et al. [ 28 ]. Also, BHR20–BHR720 are positively related with SENT across the all regression models, which is not consistent with the investor sentiment hypothesis. However, values are not statistically significant.

Consistent with previous studies [ 32 , 33 ], PRV record positive signs of the coefficients for the BHRs except for BHR720 returns, and the coefficient values are significant for BHR120 and BHR240 at the 5% level. The HOT dummy variable coefficients are negative in the short run, and the long-time horizon coefficient values are positive. Regression results indicate that PLNT , HTL , and BNK industries have a positive, though not statistically significant, relationship with short-term aftermarket returns. Over the longer time horizon, HTL coefficients are still positive, and the other two industry coefficients turn negative. For the HTL sector, the only coefficient of HTL is significant at the 5% level for BHR720 returns. Nevertheless, we used the Wald test to test for the joint hypothesis for industry effect ( Table 10 ) and found that the three coefficients of industries are simultaneously equal to zero.

Note: This table presents the Wald joint hypothesis test results. Market-adjusted buy-and-hold returns (BHRi) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively. Chi-square test statistics values are given in the table, and the probability of chi-squared values are recorded in parenthesis. ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

In the final stage of multiple regression analysis, we checked for the heteroscedasticity and autocorrelation errors in the results ( Table 11 ). Using the Breusch–Pagan, autoregressive conditional heteroscedasticity, and White’s heteroskedasticity tests, we obtained similar results showing that the model residuals do not consist of heteroscedasticity errors. Also, we conducted two autocorrelation tests, the Breusch–Godfrey and Durbin–Watson tests, and ensured that our multiple regression results were free from autocorrelation errors.

Note: This table presents the heteroscedasticity and autocorrelation test results. Decision rule: dL < t statistic > dU = Zone of indecision, t statistic > dU = No autocorrelation, t statistic < dU = Positive autocorrelation. Market-adjusted buy-and-hold returns (BHRi) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively. Chi-square test statistics values are given in the table, and the probability of chi-squared values are recorded in parenthesis. ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

Robustness check

For the robustness check, we repeated our multiple regression analysis by removing 11 delisted firms which occurs during the 720 trading days from the IPO issue. Our overall results regarding the aftermarket performance of IPOs still hold, but there are very few changes ( Table 12 ). We have found the signs of all explanatory variables to be almost identical and unchanged from the results in Table 9 , except for two minor cases. First, the HOT coefficients are positive in all of BHR20–BHR720 in the new regression results. Second, HTL sector IPOs show a negative relationship in the BHR20 and BHR60 periods and later all show positive aftermarket returns. However, the new results have created some variations in the significance of the variables. Interestingly, all R 2 values are increased, and the significance of the F-statistic remains the same in the new results. Thus, we conclude that our results are robust.

This table presents the robustness regression results after excluding 11 delisted firms from the sample. Market-adjusted buy-and-hold returns (BHR i ) are calculated for six periods namely BHR20 to BHR720 considering 20, 60, 120, 240, 480 and 720 trading days respectively. IR denotes the initial returns; MAAR denotes the market adjusted abnormal return; AGE denotes the history of the firm from its incorporation; SIZE denotes the gross proceeds from the IPO; PRC denotes the issue price of an IPO in Sri Lankan Rupees; SENT is a proxy for investor sentiment; VOL denotes the annual volume of listings in the stock market; MVL refers to the standard deviation of daily market returns for the first 30 trading days after the IPO; HOT denotes the hot-period issues; PRIV denotes the privatization issues; BRD denotes the listed board types; and HTL, PLNT, and BNK are three dummies for the hotel, plantation, and banking industries, respectively. ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.

This study focused on the evaluation of the performance of initial price offerings (IPOs) price performance up to 36 months including the listing day in terms of market-adjusted buy and hold returns (BHRs) and market-adjusted cumulative average returns (CAARs) and the practicality determinants at the time of IPO issues to find explanations for the IPO aftermarket performance. Average market-adjusted returns and CAARs are always lower than 1%. Averagely abnormal returns are negative in the short run, and abnormal returns gradually become positive in the long run. Over the three years, IPOs outperform with positive 12.46% BHRs. We found that initial returns have a long-term significant negative relationship with all BHRs and that the outcomes are consistent with the divergence of opinion hypothesis. Market volatility and aftermarket returns are negatively related throughout the all considered periods. Privatized IPOs show a significant positive relationship with one-year aftermarket returns. Hot issue period IPOs are positively related with first trading month aftermarket returns, while other periods are not significant. Similarly, plantation sector IPOs show a positive and significant relationship in short run BHRs. We do not accept the ex-ante hypothesis in aftermarket performance as five variables age of the firm, issue size, listed board effect, market volatility, and the IPO price are jointly not significant. Aftermarket returns are positively related with investor sentiment, and the annual volume of listings are based on the firm went to the public. For the robustness check, we re-estimated the multiple regressions by using the sample of 133 firms after removing delisted companies from the original sample. We found that the signs of most of the explanatory variables are unchanged and remained the same as the full sample results.

Consequently, we suggest that investors should hold their subscriptions of IPO shares for a prolonged time frame, usually exceeding two years, as the dynamic of shares rewards the investors with positive abnormal returns in the long run. Though intrinsic characteristics of IPO firms may constitute a bias to this pattern, it is still worthwhile for investors in emerging stock exchanges to monitor the performance of IPO firms over the long-run.

Supporting information

Acknowledgments.

We greatly appreciate the comments and suggestions given by the Journal Editor and anonymous referees.

Funding Statement

This research was funded by the Shandong University of Technology Ph.D. Startup Foundation (Grant No. 719017) and National Social Science Foundation of China, Grant No. 21CGL050. The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript. No any authors received a salary from the above mentioned funder.

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News & Insights

When is the Starlink IPO Date and Can You Invest? (Updated 2024)

May 15, 2024 — 04:30 pm EDT

Written by Melissa Pistilli for Investing News Network  ->

There's been a great deal of speculation surrounding a potential Starlink initial public offering (IPO).

Elon Musk's satellite internet business been referred to by many as the future of global connectivity , offering low latency and high speed in even the most remote locations. To date, the company controls roughly 6,000 satellites and boasts over 2.7 million subscribers, and the idea of an impending Starlink stock release date has investors excited.

The main reason for this interest is Musk's reputation in the investment space. Despite recent pitfalls at X, previously known as Twitter, the man has been involved in multiple highly successful and high-profile tech companies. Starlink itself is an offshoot of one of his other companies, SpaceX.

Even without Musk's involvement, Starlink has immense market potential. A lack of connectivity is one of the most significant bugbears facing the proliferation of technology like autonomous vehicles and the internet of things. By removing this restriction, Starlink could cultivate a flood of invention and innovation and allow edge computing to thrive.

The company is now working with Mexico to provide free internet to remote regions, and Telstra Group (ASX: TLS ,OTC Pink:TTRAF) recently became one of the first service providers to offer Starlink connectivity to rural Australians . In October 2023, following the launch of its war on Hamas, Israel entered into talks with SpaceX to secure the use of Starlink satellites as a backup communications system. Aside from that, parent company SpaceX was recently awarded a contract by the Pentagon in the US to provide internet terminals for use in Ukraine .

Though a Starlink IPO has yet to be officially announced, there has been a great deal of speculation, and some experts have suggested that the occasion may be closer than many realize. With that in mind, those considering a Starlink investment must ensure they understand the company and its technology as soon as possible.

​What is satellite internet?

A satellite internet connection transmits and receives data via a network of near-Earth satellites. Though this technology isn't new, it has evolved considerably over the past several years. At the time of its inception, it was generally only used by subscribers in remote areas who had few other options for connectivity.

The history of satellite internet traces back to 1962, with the world's first commercial communication satellite . Known as Telstar 1, the satellite was launched by NASA in response to Russia's successful launch of the satellite Sputnik 1. It had a short life, however; Telstar launched one day after high-altitude nuclear weapons testing, and radiation from the tests damaged electronics on the satellite. It was only operational for seven months before it was rendered inoperable.

Interestingly, the idea of transmitting information via satellite wasn't new at the time of Telstar's launch. Decades earlier, astronautics theorist Herman Potočnik first proposed the concept of geostationary orbital satellites in his 1929 book "Das Problem der Befahrung des Weltraums - der Raketen-Motor," which translates to "The Problem with Space Travel: the Rocket Motor ." Renowned futurist Arthur C. Clarke would later cite Potočnik's work in a 1945 paper envisioning satellite communication.

The first real use of satellite internet would not occur until the late 20th century via the Teledisc project , funded by Microsoft (NASDAQ: MSFT ). First proposed in 1994, Teledisc planned to establish a network of low-orbit broadband satellites. Unfortunately, the project was rendered defunct in 2002 shortly after the failure of two similar ventures, Iridium and Globalstar.

One year later, in 2003, French satellite operator Eutelsat became the first company in the world to launch a successful satellite internet project . Since then, multiple service providers and telecommunications companies have dabbled in satellite connectivity. However, it has largely lagged behind its technological peers, primarily only seeing use in particularly isolated regions.

To explain why, we need to first explain the different types of internet. The two most common are land-based connections and cellular or mobile connections.

Landline internet uses telephone lines, coaxial cables or dedicated fiber-optic cables to send and receive data from a modem or router. This device then serves as an access point, allowing everything from computers to smart home appliances to connect to the internet. Mobile internet, meanwhile, leverages nearby cell phone towers to beam data directly to and from connected devices.

Traditional satellite internet is something of a fusion between mobile and landline, albeit over a vastly larger distance. It leverages a satellite dish connected to two modems. One modem is used for sending data and the other for receiving.

Historically, speed and capacity represent the two most significant drawbacks to satellite internet. Most satellite internet service providers only support speeds between 25 and 300 megabits per second (mbps). By contrast, landline fiber internet is capable of speeds up to 5 gigabits per second (gbps). Satellite internet also tends to be far costlier than a comparable landline connection, with higher latency and lower caps on data usage. It may also suffer from issues with reliability. Lastly, satellite internet may suffer from interference due to factors such as terrain or canopy coverage.

That brings us around to what makes Starlink exciting. Although not yet competitive with landline internet in terms of cost, the company offers considerably higher data caps and speeds than any other provider on the market — up to 500 mbps with a 1 terabyte cap. Starlink's low-orbit satellites are also less vulnerable to geographic interference while offering more consistent and reliable coverage.

​Does Starlink have an IPO date?

At the time of this writing, Starlink was not publicly traded, and there was no concrete date for a Starlink IPO. Hints of a possible Starlink IPO originally came from several tweets made by Musk in 2021 .

"Once we can predict cash flow reasonably well, Starlink will IPO," he explained at the time. "(It will be) at least a few years before Starlink revenue is reasonably predictable. Going public sooner than that would be very painful."

Musk added later that year that Starlink's parent company SpaceX "needs to pass through a deep chasm of negative cashflow over the next year or so to make Starlink financially viable."

At the time, Musk said a Starlink IPO wasn't likely until at least 2025 or later.

No surprise then that market watchers’ eyebrows rose when listening to SpaceX President and Chief Operating Officer Gwynne Shotwell speak at the February 2023 Commercial Space Transportation Conference. While discussing a planned testing milestone for SpaceX's rockets, Shotwell claimed that 2023 was the year Starlink would make money .

She added that the company had a cashflow-positive quarter in 2022. There was also SpaceX's reported revenue for 2022 — just over US$3.3 billion, US$1 billion of which originated from Starlink.

In early November 2023, Musk reported that Starlink had once again “achieved breakeven cashflow."

Shortly after, an anonymous source told Bloomberg that a Starlink IPO could be on the table for 2024. But Musk quickly fired back in a post on X that the report was “false.”

It seems fairly clear based on Musk's comments that we shouldn't expect a Starlink IPO anytime soon. So why is there so much speculation that one is just around the corner?

Well, for one thing Starlink sales dominated SpaceX’s 2023 revenues , meaning the company made more money as an internet provider than as a space rocket company. Starlink revenues topped a massive US$4.2 billion last year, compared to US$3.5 billion for the firm's core rocket launch business.

Of course, these figures should be taken with a very large grain of salt. As is too often the case in technology investing, there is no shortage of hype surrounding Starlink, much of it drummed up by Musk himself. An April 2024 BNN Bloomberg article points out that even with all that revenue, Starlink “is still burning through more cash than it brings in.” Based on anonymous inside sources, Starlink accounting is “more of an art than a science."

Even if those numbers are inflated, the company does show promise, and analysts are still optimistic that a Starlink IPO is on the horizon. Justus Parmar, founder and CEO of venture capital firm Fortuna Investments, told Reuters he’s eyeing 2025 or 2026. “(Musk’s) waiting for a level of stability or predictability in revenue,” he said. Once the IPO is official, Parmar believes it will “be an extremely strong catalyst for everything space related.”

How can you get exposure before the Starlink IPO date?

While it's impossible to invest directly in Starlink, you may be able to get a head start by investing in Tesla (NASDAQ: TSLA ), as Musk stated he'll "do his best" to give preference to long-term Tesla shareholders. There are platforms such as Hiive that enable accredited investors to purchase shares of pre-IPO companies, including SpaceX.

Fortunately, you have several options if you simply want to invest in satellite internet and aren't particularly attached to the idea of Starlink. In spite of their failed efforts in the early 2000s, both Iridium Communications (NASDAQ: IRDM ) and Globalstar (NYSEAMERICAN: GSAT ) are currently going strong. Globalstar's performance is especially promising, as the company had increased in value by roughly 210 percent over the past five years as of early May 2024.

Other potential satellite internet investments include ViaSat (NASDAQ: VSAT ), EchoStar (NASDAQ: SATS ) and Gilat Satellite Networks (NASDAQ: GILT ).

As with any investment, it's important to do your research and speak to an accredited brokerage or investment advisor before you commit any capital.

​Investor takeaway

From an investment perspective, Starlink displays incredible promise. The company's ties to Musk, a man with an established track record of successful technology startups, has generated considerable interest out of the gate. Yet even ignoring the connection to Musk, Starlink has a massive potential addressable market thanks to ongoing demand for better connectivity and a relative dearth of viable options for edge computing.

Trends such as distributed work and the proliferation of internet of things devices will only further drive this demand.

With that said, it's best to exercise a degree of restraint where Starlink is concerned. Although the company will very likely be a sound investment once it goes public, there is currently a great deal of exaggerated hype and speculation surrounding it. Anyone who chooses to add Starlink shares to their portfolio if the company does go public should first ensure they understand what to expect — something they cannot do by listening to hype alone.

This is an updated version of an article first published by the Investing News Network in 2023.

Don't forget to follow us @INN_Technology for real-time news updates!

Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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