Pre IPO and Post Ipo Operating Performance Evaluation on Indian Select Companies

 

Dr. Sharon Valarmathi¹,Christo Jossy², Ashwin Babu³

¹Associate Professor, Christ University, Bangalore, 560029

²Research Students (M.Com), Christ University, Bangalore, 560029

³Research Students (M.Com), Christ University, Bangalore, 560029

 

ABSTRACT

This paper investigates the relationship between pre IPO factors over post IPO operating performance and whether there is a change in operating performance of companies after IPO. The study involves 25 companies listed on Indian stock exchanges (BSE and NSE) listed during 2013 - 2015. Pre IPO factors involve dilution of ownership and pre IPO profitability and operating performance indicators are Return on Assets, Return on Equity/Net worth. Findings confirmed that there is no significant change in return on assets, return on net worth/equity and asset turnover ratio of the companies after IPO. Pre IPO profitability had an impact on return on assets and return on equity while pre IPO profitability and dilution of ownership does not have any impact on asset turnover ratio.

 

 

 

1. INTRODUCTION:

The Initial Public Offering (IPO) is a platform for the general public to become shareholders of a company when it is listed on the stock exchange for the first time. The company directly collects the fund paid by the investors for the issued shares. An IPO, therefore, helps a company to attract a wider pool of investors for increasing the capital as it will assist in the future growth. Instead of repaying the capital invested by the investors the company is bound to distribute its profits or loss to the shareholders.

 

It is believed that these capital investments make shareholdings more valuable in absolute terms and once a company is listed, it will be able to further issue shares via rights or bonus issues, thereby providing it with capital for expansion without incurring additional debt. The primary reason for most of the companies to seek public listing is, they can raise a significant amount of capital from the general market, rather than seek and negotiating with individual investors or financial institutions.

 

Financial performance is a measurement which evaluates how well a firm uses its assets to generate revenues. It can be used to analyse the financial status of the firm during a given period. Financial analysis is conducted in a firm to understand the financial performance of the company. Financial analysis is the use of financial statements to analyse a company's financial position and the future financial performance.

 

More attention is not paid to the study of pre-IPO factors that determine the post-IPO operating performances of companies (Lamba and Otchere, 2001). Moreover, the performance of IPOs is not only sensitive to different measures and methodology but also different sample periods.

 

This study makes an absolute contribution in the IPO. First, the post-IPO and the pre-IPO comparison are made in this study to find out whether there is a difference in operating performance after IPOs.The key variables used for the analysis are Return on Assets, Return on Equity and Asset Turnover Ratio. Secondly, this study tries to find out whether pre-IPO factors influence post IPO operating Performance

 

2. LITERATURE REVIEW:

Ahmad and Lim (2001) examined the relationship between post-IPO operating performance and pre-IPO factors of 162 IPOs from various industries and their results indicated that age of firm; multi-nationality and dilution of ownership were not significant in determining the post-IPO operating performance. Size of the firm had a significant negative relationship between post-IPO operating performance when ROA and ATO were used as measures of operating performance. They also found that there is a significant negative correlation between pre-IPO firms profitability and post-IPO operating performance when measured by ROA and ROS.

 

According to Catherine S F Ho and Raja Aerol Shariza Raja Amir Hamzah (2011), their findings confirmed that pre-IPO profitability and firm size are the key predictors of post-IPO performance.

 

Mark Kroll, Bruce A. Walters and Son A. Le (2007) they have attempted to provide insights regarding board configurations for young post-IPO firms. Given the often poor performance of post-IPO firms exploring the reasons for such underperformance is an important endeavor. The board composition of a firm undertaking an IPO is in part the result of a negotiation between the firm's TMT and external financiers investing in the firm. Senior executives wish to retain as much control and discretion over resources as possible, while external investors seek to ensure that a priori expectations are met, and agency costs minimize C.N.V. Krishnan, Vladimir I. Ivanov, Ronald W. Masulis, and Ajai K. Singh (2011) they have examined the association of a venture capital (VC) firm's reputation with the post-initial public offering (IPO) long-run performance of its portfolio firms. They found that venture capital reputation, which is measured by the past market share of venture capital-backed IPOs, has a significant positive association with the performance measures in the long run. While reputable venture capitals initially select better-quality firms, even after controlling venture capital selectivity, reputable venture capitals exhibit a better active post-IPO involvement in the corporate governance of their portfolio firms. So this continued venture capital involvement has positively influenced post-IPO firms performance.

 

According to Bharat A. Jain and Omesh Kini (2007), post-IPO operating performance and equity retention by the original entrepreneurs are significantly correlated. But there is no relation between post-IPO operating performance and the initial level of underpricing. Post to the issue there is declines in the market-to-book ratio, earnings per share, and price/earnings ratio is also documented.

 

Pritpal Singh Bhullar and Dyal Bhatnagar (2014) examined, the short-term performance of IPO is influenced by the number of times IPO subscribed, the time delay between offer losing date and listing date and also the size of the issue and Indian macroeconomic factors had also an impact on the performance of IPO. 

 Ahmed S. Alanazi and Benjamin Liu (2013) According to this study operating performance declines after going public. They found that the performance decline is associated with the firm transition from private into public ownership due to increasing agency costs.

 

3. OBJECTIVE:

1.      To find out the impact of IPO in operating performance of select Indian companies.

2.      To identify the relationship between pre IPO factors over post IPO operating performance.

 

4. RESEARCH METHODOLOGY:

The financial data from the newly listed companies were collected from NSE INDIA as well as individual company’s financial reports from 2011 to 2016. The set of variables investigated and their respective proxies which are the ratios used in the analyses are listed in Table.

 

The study is based on selected 25 Indian companies listed on NSE and BSE. The t-test is used to analyze the pre and post IPO operating performance, and Regression analysis is used to find the relationship of pre IPO factors on post IPO operating performance. SPSS 20 was used in this study.

 

Table 1: List of Variables and Measurement

Variables
Return on Assets	Net income / net assets
Return on Equity	Net income / shareholders equity
Asset Turnover Ratio	Net sales / total assets
Pre IPO profitability	Operating income / net assets
Dilution of ownership	Shareholders equity / total assets

 

 

 

5. HYPOTHESIS:

H₀: IPO does not have any significant impact on return on Assets, return on equity and asset turnover ratio of select Indian companies.

H_1: IPO has a significant impact on return on assets, return on equity and asset turnover ratio of select Indian companies.

H_0:  Pre IPO profitability and dilution of ownership does not have any impact on post IPO operating performance.

H_1: Pre IPO profitability and dilution of ownership has a significant impact on post IPO operating performance of select Indian companies

 

6. ANALYSIS AND INTERPRETATION:

T-Test analysisT-Test analysis is used in this study to find out whether there is a significant difference in the operating performance of companies before and after IPO.

 

Return on assets:

The paired-samples t-test procedure automatically computes the correlation between the two sets of data (Table 2.1). There is a positive relationship between the return on assets before and after IPO (r = .67, p < .05), indicating that the IPO had an impact on return on capital employed.

 

Table 2.1 Paired Samples Correlations

	N	Correlation	Sig.
PREROA & POSTROA	25	.671	.000

 

A paired-samples t-test revealed that there is no significant differences in the return on assets before and after IPO, t (24) = -.053, p = .958 (Table 2.2).

 

Return on net worth/equity:

The paired-samples t-test procedure automatically computes the relationship between the two sets of IPO (Table 3.1). There is a positive relationship between the return on net worth/equity before and after IPO (r = .26, p =.196), indicating that the IPO had an impact on return on capital employed. A paired-samples t-test results revealed that there is not a significant differences in return on equity/net worth, t (24) = -.306, p = .762 (Table 3.2).

 

Table 2.2 Paired Samples Test:

	Paired Differences					t	df	Sig. (2-tailed)
	Mean	Std. Deviation	Std. Error Mean	95% Confidence Interval of the Difference
				Lower	Upper
PREROA-POSTROA	-.040	3.769	.754	-1.596	1.516	-.053	24	.958

 

Table 3.1Paired Samples Correlations

 

Table 3.2 Paired Samples Test

		Paired Differences					t	df	Sig. (2-tailed)
		Mean	Std. Deviation	Std. Error Mean	95% Confidence Interval of the Difference
					Lower	Upper
Pair 1	PRE ROE – POST ROE	-2.360	38.584	7.717	-18.287	13.567	-.306	24	.762

 

Asset turnover ratioThe paired-samples t-test procedure computes the correlation between the pre and post asset turnover ratio (Table 4.1). There is a significant positive relationship between the asset turnover ratio before and after IPO (r = .89, p < .05), indicating that the IPO had an impact on return on capital employed. A paired-samples t-test revealed that the results are statistically insignificant, t (24) = 1.40, p = .172 (Table 4.2).

 

Table 4.1 Paired Samples Correlations

 

Table 4.2 Paired Samples Test

	Paired Differences					t	df	Sig. (2-tailed)
	Mean	Std. Deviation	Std. Error Mean	95% Confidence Interval of the Difference
				Lower	Upper
PREATO-POSTATO	10.640	37.770	7.554	-4.951	26.231	1.409	24	.172

 

Regression Analysis:

In summary, the analysis of the pre-IPO determinants of the post-IPO performances are Carried out by estimating the three models as follows:

Model 1: Post-IPO Performance of ROA

ROA = a₀ + a₁ pre ipo profitability +a₂ dilution of

 

 

Model 2: Post-IPO Performance of RON/E

RON/E == a₀ + a₁ pre ipo profitability +a₂ dilution of ownership

Model 3: Post-IPO Performance of ATO

ATO = = a₀ + a₁ pre ipo profitability +a₂ dilution of ownership

 

Model 1:

A multiple regression was run to find the influence of pre IPO factors such as pre-IPO profitability and dilution of ownership on return on Assets after IPO. The assumptions of linearity, independence of errors, homoscedasticity, unusual points and normality of residuals were met. These variables statistically significantly related to return on capital employed, F(2, 22) = 11.9, p < .005, adj. R2 = .478. Out of two variables only pre profitability is statistically significant to the prediction, p <.05 and dilution of ownership is not significant. Regression coefficients and standard errors are listed below Table.

 

Table 5.1 Model Summary

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate	Change Statistics
					R Square Change	F Change	df1	df2	Sig. F Change
1	.722a	.522	.478	2.689	.522	11.996	2	22	.000

A Predictors: (Constant), DO, PREPRO

 

Table 5.2 ANOVA^a

 

Table 5.3 Coefficients

Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.	95.0% Confidence Interval for B
		B	Std. Error	Beta			Lower Bound	Upper Bound
1	(Constant)	.857	.893		.959	.348	-.995	2.709
	PREPRO	.621	.129	.845	4.804	.000	.353	.889
	DO	.370	.204	.320	1.818	.083	-.052	.792
a. Dependent Variable: postroa

 

Model 2:

A multiple regression was run to find the influence of pre IPO factors such as pre-IPO profitability and dilution of ownership on return on net worth/equity after IPO. The assumptions of linearity, independence of errors, homoscedasticity, unusual points and normality of residuals were met. But these variables are significantly related to return on net worth, F(2,22) = 4.71, p < .005, adj. R2 = .23. Out of two variables only pre profitability is statistically significant to the prediction, p < .05 and dilution of ownership is not significant. Regression coefficients and standard errors are listed below Table.

 

Table 6.1 Model Summary

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate	Change Statistics
					R Square Change	F Change	df1	df2	Sig. F Change
1	.548a	.300	.236	6.260	.300	4.713	2	22	.020

a. Predictors: (Constant), DO, PREPRO

 

Table 6.2 ANOVA^a

a. Dependent Variable: postroe

b. Predictors: (Constant), DO, PREPRO

 

Table 6.3 Coefficients^a

Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.	95.0% Confidence Interval for B
		B	Std. Error	Beta			Lower Bound	Upper Bound
1	(Constant)	3.736	2.079		1.797	.086	-.575	8.048
	PREPRO	.923	.301	.652	3.065	.006	.298	1.547
	DO	.720	.474	.323	1.519	.143	-.263	1.703
a. Dependent Variable: postroe

 

 

Model 3:

A multiple regression was run to find the influence of pre IPO factors such as pre-IPO profitability and dilution of ownership on asset turnover ratio after IPO. The assumptions of linearity, independence of errors, homoscedasticity, unusual points and normality of residuals were met. But these variables are not significantly related to asset turnover ratio, F(2,22) = .06, p > .005, adj. R2 = -.085. both dilution of ownership and pre IPO profitability is not significantly related to asset turnover ratio. Regression coefficients and standard errors are listed in below Table.

 

Table 7.1 Model Summary

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate	Change Statistics
					R Square Change	F Change	df1	df2	Sig. F Change
1	.074a	.005	-.085	85.437	.005	.060	2	22	.942
a. Predictors: (Constant), DO, PREPRO

 

Table 7.2 ANOVA^a

 

Table 7.3 Coefficients^a

Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.	95.0% Confidence Interval for B
		B	Std. Error	Beta			Lower Bound	Upper Bound
1	(Constant)	93.390	28.375		3.291	.003	34.544	152.237
	PREPRO	-.650	4.108	-.040	-.158	.876	-9.171	7.870
	DO	-2.232	6.470	-.087	-.345	.733	-15.650	11.186
a. Dependent Variable: POSTATO

 

7. FINDINGS AND DISCUSSION:

The results of the t-test indicate that return on assets and asset turnover ratio are positively correlated before and after IPO but there is no significant difference after IPO. The t-test results indicate that IPO doesn’t impact operating performance of the companies. The results for the three models for the determinants of pre-IPO factors on post-IPO performances proves that pre IPO profitability has an impact on return on assets. The adjusted r square shows that 47.8% percent of the changes in post-IPO performance with the overall model being significant according to the F-statistics. There is also a positive relation between dilution of ownership of the firm with the post-IPO performance, but it is not statistically significant.

 

In Model 2 with return on net worth/equity as the measure for post-IPO performance, pre IPO profitability and dilution of ownership were found to be significant in determining the post-IPO performance. However, the adjusted R-squared is only 23.6%, and the F-statistics indicates that the overall model is statistically significant.

 

Using asset turnover (ATO) as the post-IPO performance indicator in Model 3, it is found that pre IPO factors are negatively correlated to post IPO performance which is statistically insignificant. The adjusted R-squared is -8.5% and F-statistics indicates that overall model is not significant.

 

8. CONCLUSION:

In a nutshell, we can say that there is no significant change in return on assets, return on net worth/equity and asset turnover ratio of the companies after IPO. Pre IPO profitability had an impact on return on assets and return on equity while pre IPO profitability and dilution of ownership does not have any impact on asset turnover ratio.

 

9. REFERENCES:

1      Ahmad Z. And Lim, S.M. (2001). Operating Performance of Initial Public Offerings In Malaysia. The Malaysian Finance Association 7th Annual Conference, Universiti Sains Malaysia, Malaysia.

2      Bhatnagar, D. S. (2014). Analysis of Factors Affecting Short Term Performance of Ipos In India. Pacific Business Review International.

3      Chi, J. And Padgett, C. (2006). Operating Performance and Its Relationship To Market Performance of Chinese Initial Public Offerings, The Chinese Economy, 39(5).

4      Hamzah, C. S. (2011). Pre-Ipo Characteristics and Post-Ipo Operating Performance In Malaysia. Business Management Quartely Review.

5      Kini, B. A. (1994). The Post-Issue Operating Performance of Ipo Firms. The Journal Of Finance, Vol. 49, No. 5 (Dec., 1994), Pp. 1699-1726.

6      Krishnan C.N.V, V. I. (2011). Venture Capital Reputation, Post-Ipo Performance, and Corporate Governance. Journal of Financial And Quantitative Analysis Vol. 46, No. 5, Oct. 2011.

7      Liu, A. S. (2013). Ipo Financial And Operating Performance: Evidence From The Six Countries of The Gcc. Ssrn Electronic Journal · March 2013.

8      Mark Kroll, B. A. (2007). The Impact of Board Composition and Top Management Team Ownership Structure on Post-Ipo Performance In Young Entrepreneurial Firms. The Academy of Management Journal, Vol. 50, No. 5 (Oct., 2007), Pp. 1198-1216.

APPENDIX 1

Selected companies for the study are as follows:

sl no	company	year
1	Bothra Metals	2012 - 2013
2	National Buildings Construction Corporation Limited	2012 - 2013
3	PC Jeweller Limited	2012 - 2013
4	VKS Projects Limited	2012 - 2013
5	Speciality Restaurants Limited	2012 - 2013
6	Mt Educare Limited	2012 - 2013
7	Suyogtelematics	2013 - 2014
8	Bcpowercontrols	2013 -2014
9	Mitcon Consultancy	2014 - 2014
10	Lakhotia Poly	2014 - 2014
11	Power Grid Corporation	2014 - 2014
12	Captain Pipes	2014 - 2015
13	SVP Housing	2014 - 2015
14	AGI Infra	2014 - 2015
15	SSPN Finance	2014 - 2015
16	Akme Star	2014 - 2015
17	Ortel Comm	2014 - 2015
18	Siddhi Vinayak	2014 - 2015
19	Anubhav Infra	2014 - 2015
20	Raghuvansh Agro	2014 - 2015
21	Amsons Apparels	2014 - 2015
22	Sanco Ind	2014 - 2015
23	RCI Industries	2014 -2014
24	Just Dial	2014 -2014
25	Ashapura Intima	2014 -2014

 

 

 

 

 

Received on 27.09.2017                Modified on 31.10.2017

Accepted on 22.12.2017            ©A&V Publications All right reserved