Beyond the listing mystique: unravelling underpricing in Indian startups’ initial public offerings and its association with subsequent share performance

Purpose Globally, startups are recognized as the primary forces behind economic expansion. They are also expected to usher in a new era of economic prosperity and innovation in India. This study aims to assess the market performance of initial public offerings of eight Indian startups launched in the year 2021. It helps investors and researchers to see beyond the initial market frenzy and also determine an appropriate exit strategy. Design/methodology/approach The performance is measured on the listing date as well as one year ahead, using stock trading prices. The securities are analyzed using the Sharpe ratio, t-test, year-to-date comparisons and correlation tests. The analysis has been done on a comparative basis. Findings It revealed that these initial public offerings were majorly underpriced upon issue and opened up to high listing gains for the investors. However, the price run was short termed as the stocks underperformed as compared to the bullish market. This was accompanied by a dramatic fall in share prices and erosion of investor wealth. Further, correlation tests revealed the inverse correlation between underpricing and stock performance. Research limitations/implications The investors are thus advised to study the key financials of the company as many times as possible, as the current market price might be a result of over-favored market sentiment and deliberate underpricing. Such a bubble burst in the future may result in investor wealth erosion. Investors trying to navigate the erratic nature of these offers must comprehend the dynamics of underpricing in startup initial public offerings. Understanding the connection between underpricing and long-term performance can help practitioners develop more effective initial public offering (IPO) pricing and marketing plans. Getting a hold of the dynamics may also help policymakers, who have the power to shape laws pertaining to investor protection and initial public offerings. Future research must consider market evolution, technological effects on investor behavior and how global market trends affect startup initial public offerings. The research is also based on a small sample size and focussed on a short time period. The research does not account for rapidly changing market conditions, such as technological advancements or shifts in regulatory environments, which can have significant implications for IPO performance and investor behavior. Further research can be conducted keeping these factors in mind. Practical implications The investors are thus advised to study the key financials of the company as many times as possible, as the current market price might be a result of over-favored market sentiment and deliberate underpricing. Such a bubble burst in future may result in investor wealth erosion. Investors trying to navigate the erratic nature of these offers must comprehend the dynamics of underpricing in startup initial public offerings. Understanding the connection between underpricing and long-term performance can help practitioners develop more effective IPO pricing and marketing plans. Getting a hold of the dynamics may also help policymakers, who have the power to shape laws pertaining to investor protection and initial public offerings. Future research must consider market evolution, technological effects on investor behavior and how global market trends affect startup initial public offerings. Social implications The investors are thus advised to study key financials of the company as many times as possible, as the current market price might be a result of over-favored market sentiment and deliberate underpricing. Such a bubble burst in future may result in investor wealth erosion. Investors trying to navigate the erratic nature of these offers must comprehend the dynamics of underpricing in startup initial public offerings. Understanding the connection between underpricing and long-term performance can help practitioners develop more effective IPO pricing and marketing plans. Getting a hold of the dynamics may also help policymakers, who have the power to shape laws pertaining to investor protection and initial public offerings. Future research must consider market evolution, technological effects on investor behavior and how global market trends affect startup initial public offerings. Originality/value The study is significant, as there are only a handful of studies focused on the comparative analysis of startup stocks. It will be beneficial in helping the investors in better analysis and stock selection. It will prevent them from falling into the trap of opaque valuations and market-created sentiments.