IJMB Journal – Abstracts
International Journal of Management and Business
IJMB Volume VI, Issue 2
The Effect of Business Group Affiliation on the Pricing of New Equity Issues
Supriya Katti* and B.V. Phani
Indian Institute of Technology (IIT), Kanpur, India.
Information asymmetry is one of the important reasons for mis-pricing the new equity issues. It is identified as one of the important reasons for observing underpricing of initial public offerings (IPO). Therefore, firm attributes that help in reducing the information asymmetry affect the degree of IPO underpricing. The business group affiliation (BGA) is one of the important, firm-specific attributes which exhibit diversified operation and longer operating history. As a result, a BGA firm has a reduced degree of information asymmetry while issuing new equity. Due to these reasons it is expected to observe a lower degree of underpricing of IPO for BGA firms. Empirical evidence of our study reveals that the BGA in itself is not significant in determining the degree of IPO underpricing. However, BGA IPOs exhibit a lower degree of underpricing subject to the interaction effect of business group affiliation with other issue-specific characteristics such as issue mechanism and oversubscription. The study reveals that group affiliation acts as a moderator in determining the degree of IPO underpricing in emerging markets.
Keywords: Business group, Initial public offering, Oversubscription