An Examination of Adverse Selection Risk in Indian IPO After-Markets using High Frequency Data

Using Volume-synchronized Probability of Informed trading (VPIN), we examine the evolution of ex-post adverse selection risk in the IPO aftermarket of a sample of 70 Indian firms. We find that adverse selection risk is highest on IPO listing day, and gradually reduces over the subsequent weeks. We observe that the degree of IPO underpricing is negatively related to ex-post adverse selection risk in the IPO aftermarket, suggesting that information production induced through IPO underpricing is able to mitigate adverse selection problems in IPO aftermarket. We also find that the ex-post adverse selection risk is related to various IPO, firm and liquidity characteristics.