Social comparison behavior of firms and Underpricing of IPOs in India

Abstract

This paper is an empirical research of social comparison behavior in Indian IPO market. To our knowledge this is the first study which is testing behavioral theory on Indian IPOs. As numerous evidences suggest the theories of behavioral finance are more efficient in explaining the stock market behavior than the traditional finance theories based on rational decision making. In the presence of international evidence of social comparison behavior in IPO market, we also assume this behavior in the Indian IPO market. The social comparison behavior found to be present in Indian IPO market and explains a fraction of underpricing. The objective of this paper is to find out whether there is a social or peer comparison among IPO issuing firms in India. For this purpose P/E and P/B ratios are used to statistically test whether an IPO firm in India follows earlier IPO firms P/E and P/B ratios while deciding its own price band and issue price.

Keywords: Behavioral Finance, Social Comparison, IPO Underpricing