This paper investigates the initial and long-run performance of 438 IPOs listed on the BSE between June 1992 and March 2006. Underpricing of an IPO is measured as the return on the first day of trading (relative to the offering price). To examine the long-run performance of Indian IPOs, Buy-and-Hold Abnormal Returns (BHAR) and Cumulative Abnormal Returns (CARs) for 120 months of secondary market returns have been calculated. Benchmark-adjusted initial returns are found to be around 100%, which is in line with the previous researches in India.The underpricing also conforms to international evidence though the magnitude of initial return is higher than that of other countries. Buy-and-hold returns have been found to be negative between 18 and 40 months of holding; however, such underperformance disappears after 40 months, i.e., in India, underperformance persists for about one-and-a-half years subsequent to IPO to a little more than three years. To check the robustness of this result, CARs also exhibit the existence of underperformance in the second and third years. Thus, long-run underperformance in India appears in the second year and subsists till the third year, though it dies out in the fourth and fifth years.

Initial Public Offerings (IPOs) have been an important source of corporate financing for a long time. The empirical evidence on the pricing and performance of IPOs provides a puzzle to those who otherwise believe in efficient financial markets. The puzzle of IPOs pricing both in the short- and long-runs has become a leading example of pervasive market inefficiency (Ibbotson et al., 1994). The IPO anomalies that bother the researchers are the positive mean initial return also known as underpricing, the hot issue market, and the long-run underperformance.

Numerous studies have examined the performance of IPOs where the focus has been on the initial behavior of stock prices. The results of these studies in general report the existence of positive initial returns (Ritter, 1987, 1991; Tinic, 1988; Peavy III and John W, 1990; Aggarwal et al., 1993; and Levis, 1993). This is known as underpricing of IPOs. Nevertheless, these new issues may not be good investments in the long-term. A large volume of research has demonstrated that investors purchasing IPOs of common stocks earn a large positive abnormal return in the early aftermarket period. However, such gains from early price appreciation have not been found to be sufficient to compensate the losses that occur throughout subsequent price declines.

Applied Finance Journal, Initial Public Offerings, IPOs, Cumulative Abnormal Returns, Corporate Finance, Financial Markets, Stock Markets, Financial Economists, Indian Capital Markets, Further Public Offerings, FPOs, Equity Markets, portfolio Management, Banking Sectors, Securities and Exchanges Board of India, SEBI, Benchmarking, Financial Services, Financial Economics, Financial Management.