Role of Publicly Available Information in Shaping Initial IPO Returns: Insights from India

Abstract

The pricing of Initial Public Offerings (IPOs) is a complex process influenced by market conditions, investor sentiment, firm fundamentals and regulatory mechanisms. While traditional financial theories emphasize the role of intrinsic valuation, behavioral finance research suggests that investor attention plays a crucial role in IPO price formation. This study examines the impact of publicly available information, particularly Google Search Volume Index (GSVI), on short-term IPO underpricing and long-term performance in India. Using a dataset of 343 IPOs listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) from 2015 to 2023, this research analyzes how pre-listing investor attention influences first-day returns and subsequent price reversals. The empirical findings confirm that higher GSVI is positively correlated with initial IPO returns, indicating that heightened investor attention creates excess demand and price inflation on the listing day. However, in the long run, IPOs with high initial returns tend to underperform, suggesting that speculative demand leads to temporary mispricing, which corrects over time. The study also differentiates between voluntary underpricing (issuer-driven) and post-market mispricing (investor-driven), revealing that investor sentiment mainly affects aftermarket price distortions rather than issuer-set offer prices. These results have significant implications for investors, underwriters, and regulators. Retail investors should be cautious of IPOs with excessive pre-listing hype, while regulators may consider measures to enhance investor awareness and mitigate speculative behavior. Future research can explore alternative investor attention proxies, such as social media sentiment and online trading patterns, to further refine the understanding of digital-era IPO pricing dynamics.