The anomalous behavior of Initial Public Offerings (IPOs) has been extensively researched and debated. Numerous studies have documented stock price and operating underperformance of IPOs and suggested several reasons like earnings management, timing of issues, agency theory, etc., as causing such decline in postissue performance. This study attempts to examine the operating performance of IPOs in India for a period of five years subsequent to the issue. It specifically seeks to analyze the post-issue operating performance relative to pre-issue levels and to determine the relationship between ownership retained by the promoters and operating performance of issuing firms.

The after-market long-run price behavior of Initial Public Offerings (IPOs) has generated considerable interest among researchers, investors and practitioners the world over. Greater focus, however, has been on stock price performance for analyzing the long-run performance of IPOs with a few exceptions like Jain and Kini (1994), Loughran and Ritter (1997), Mikkelson et al. (1997), and Teoh et al. (1998) who investigated the firms’ operating performance subsequent to issue. Notably, the strong fundamentals at the time of issue have not been found to sustain for long by researchers across the world (see, for example, Jain and Kini, 1994; Cai and Wei, 1997; Loughran and Ritter, 1997; Mikkelson et al., 1997; Kutsuna et al., 2002; Yan and Cai, 2003; Kim et al., 2004; Wang, 2005; and Chi and Padgett, 2006). It, in fact, is more puzzling to know that the same firms which promise great future prospects at the time of the issue, witness a downward trend in their earnings and profitability. Empirical results document dramatic and continuing operating underperformance that is robust to industry or mean reversion adjustment. Numerous diagnostic tests for behavioral explanations uncover the upsurge in company expansion around the offering years followed by the striking dwindle soon afterwards (Yan and Cai, 2003).

Studies have held that timing of the issue by managers to exploit favorable market conditions (Jain and Kini, 1994; Loughran and Ritter, 1995; and Pagano et al., 1998), earnings management by issuing firms prior to IPOs (Rangan, 1998; and Teoh et al., 1998), and separation of ownership and control after IPOs leading to increase in agency costs (Jensen and Meckling, 1976; Jain and Kini, 1994; Kim et al., 2004; and Wang, 2005) lead to deterioration in operating performance in the post-issue period relative to pre-issue levels. Moreover, if operating performance of companies measured through profitability ratios has an impact on the development of the share price of the respective firm, then the decline in fundamental profitability can explain the underperformance of the IPOs relative to all market indices. Under this assumption, a decline in operating performance should lead to a decline in the share price and to the long-run underperformance of the IPO shares.

Applied Economics Journal, Ownership Structure, Operating Performance, IPOs in India, Initial Public Offerings (IPOs), Return on Assets, Operating Income/TA, Earnings Per Share, Return on Equity, Return on Assets, Sales.