How do investors' subscription rate and pattern affect underpricing? An empirical investigation for Indian IPOs

This study investigates subscription rates across institutional and non-institutional retail investors for 149 initial public offerings listed in Indian stock market. We document a positive relationship between underpricing and subscription rate of all investor groups. We also find a significant shift in response pattern across institutional and non-institutional retail investors towards underpriced and overpriced IPOs. Our result supports the information asymmetry argument, suggesting that informed investors (institutional investors) are heavily subscribing for underpriced IPOs and shy away from overpriced issues. Cross-sectional regression results indicate that institutional investors' subscription rate is statistically significant (and positive) while evaluating retail investors' response rate. This evidence strongly suggests that retail investors sequentially learn from more sophisticated and informed (institutional) investors while applying for IPOs. Further, it is found that non-institutional retail investors heavily subscribe for IPOs from mature firms having long operational history. Empirical results confirm that larger offers and IPOs having more post issue promoter group retention are more underpriced.