The Initial Public offerings (IPOs) of Small and Medium Enterprises (SMEs) often draw high investor speculation due to their perceived growth potential. They exhibit high gains on the listing day, but on subsequent days, their prices tend to be volatile leading to substantial losses to the investors. This paper explores whether implementing price limit policies with a high upper limit on listing day can facilitate a smooth price discovery process and help build investor confidence in the SME IPO segment.
We examine the performance of SME IPOs before and after the implementation of the price limit policy using an event study approach, calculating the cumulative abnormal returns (CARs) for both periods. Since the regulation is an exogenous shock by NSE and it is applied uniformly to all the IPOs post-regulation, it creates a quasi-natural experimental setting, and we employed the propensity score matching (PSM) approach to conduct robustness checks on the results.
We found that implementing a high upper price limit policy allowed highly underpriced IPOs to reach fair value on the first day of trading, while others achieved it in the following days. In contrast, before the policy implementation, IPOs with high initial returns exhibited negative returns on the second day. Further, we found that the SME IPOs listed after the policy implementation have less short-term volatility compared to those that listed before the regulation.
This paper examines the impact of a recently introduced price limit policy in the Indian SME IPO market. To the best of our knowledge, this is the first study to assess the effectiveness of this specific regulation. Unlike previous research, which focused on narrow price bands that often lead to increased speculation and volatility in the days following an IPO, our study investigates a high upper price limit. This policy helps highly underpriced IPOs to reach fair value while reducing speculative activity in other stocks. The policy thus promotes more efficient price discovery and enhances investor confidence in the SME segment.
