Disclosure of Intended Use of IPO Proceeds and Underpricing: Indian Evidence

It is interesting to observe the role of various certification mechanisms that a company opts before going public to signal elitism over others. There is vast literature examining the various certification mechanisms adopted by a company going public; however, there exists scant literature examining the role of disclosure of intended use of IPO proceeds and risk factors in lowering information asymmetry and underpricing in Indian economy. An endeavor is made through current study to analyze the impact of disclosure of intended use of IPO proceeds and risk factors on underpricing of 100 companies hitting the capital market for the first time from 1 April 2010 to 31 March 2012. A multivariate regression analysis reveals no relation between disclosure of intended use of IPO proceeds and underpricing in Indian market. But the disclosure of risk factors is found to relate negatively to underpricing. It implies that stakeholders rely more on other mechanisms to interpret quality of IPO and, more specifically, Indian investors rely on recommendations of middlemen in making investment decisions.