Initial Public Offer



Abstract
Initial Public Offer is a mechanism to raise capital from the public. IPO helps a company to create a public awareness about the company and its product. In addition, it is the way to increase the share capital of the company. Investing in equity shares through IPO is considered a risky investment. This is because market behavior with respect to shares issued in IPO is not known specially in volatile share market. Investments in IPOs are generally considered as a risky investment by investors. The present study tries to find out to ascertain the level of risk perception of investors in shares with respect to equity investment through IPOs and the factors affecting the risk perception with respect to investment in equity shares through IPOs. The study is carried out on the registered investors of the leading share broking firms of Allahabad city of Uttar Pradesh. It is found that the equity investors perceive equity investment through IPOs is moderately risky, and factors like Ratings (by CRISIL, ICRA, Etc.), offer price and Qualification of investor mostly affect the Risk perception of investor.

Introduction
To stay ahead of the inflation, we need options that provide an interest rate of at least equal or more than inflation. So that it will not keep eating into our purchasing power over a period of time. This is where investments come into the picture. Investments could be in anything ranging from a small business to rare antiques to gold coins, stocks, bonds, mutual funds, real estates, etc. Among which investment in Stock market is considered as one of the option high returns.There are two types of investment in equity shares .One is by directly subscribing to the IPO of the company and other is by buying equity share in secondary market (Singh, 2012).
In the recent year, there are many companies that have come up with initial public offer in India to raise fund for their requirements. Initial Public Offer is a mechanism to raise capital from the public. IPO helps a company to create a public awareness about the company and its product. In addition, it is the way to increase the share capital of the company. Investing in equity shares through IPO is considered a risky investment. This is because market behavior with respect to shares issued in IPO is not known specially in volatile share market. Investments in IPOs are generally considered as a risky investment by investors. This is because of the problem of predicting performance of stocks on its initial day of trading and in the near future, as there is often little historical data for technical analysis of the stocks
Investing is clearly risky and people routinely have to make decisions under uncertainty due to incomplete information about the options available for investment and what chances of making returns.
Risk perception is a subjective judgment that people make about the characteristics and severity of a risk. When opting for investment in shares, people try to make proper tradeoffs between risk and returns.
Depending on the amount of information an investor has regarding various stocks on the stock market determines one's risk perception. The perceived degree of uncertainty by individuals affects their decisions regarding consumption, saving and investing (Cary & Javier et al, 2008). Perceptions encompass psychological and Emotional aspects, which subsequently guide judgment and decision making.
And this makes perceived risk attitudes of investors to be more subjective rather than objective to risky situations. Therefore, different factors like demography, company's past performance, expert advice, industry performance, political environment, offer price and friends' influence play an important role in decision making while going for investment in IPOs.
' Demographic factors: Demographics are the quantifiable statistics of a given population. Major demographic factors include gender, age, income level, qualification, employment status, and location.

' Past performance of the company: As the late Benjamin Graham, father of value investing, pointed out to his readers, past performance is useful in calculating the value of a stock or any other asset only so far as it is indicative of what is to come in the future (about.com, 2014). Past performance has always been strongly considered in awarding contracts, and companies with a strong performance history have always had a higher winning percentage.
' Credit rating: It is a strong measure of riskiness of a company or its business specifically it matters a lot to investors when it has been given by the SEBI registered agencies like CRISIL, ICRA, CARE etc. Credit rating agencies typically assign letter grades to indicate ratings. Standard & Poor's, for instance, has a credit rating scale ranging from AAA (excellent) and AA+ all the way to C and D. A debt instrument with a rating below BBB- is considered to be speculative grade or a junk bond. IPO grading by a professional credit rating agency informs investors about the issuing company after analyzing factors like business and financial prospects, management quality and corporate governance practices etc. The grade is not a recommendation to subscribe to the IPO. It needs to be read with the disclosures, including risk factors (sebi.gov.in, 2014).
' Expert advice: often various market experts give their opinion and advice to their clients whenever an IPO come in the primary market.
' Industry performance: It is the overall picture of the past performance as well as the future prospects of those companies who belong to a particular industry along with the company who is bringing its IPO. So it is tool of concern for IPO investors at the time of investing.
' Political environment: Various investors do look upon the political conditions of the country and most importantly the local region where the company is operating.
' Offer price: some investors who care about the cost sensitivity i.e. whether the stock is underpriced or overpriced give attention to the offer price. Offer price is the price at which shares are ready to be sold.
' Friends/ Broker influence: It has been seen that the Investors who are not informed about the market and IPOs often be influenced by their friends or brokers by seeing them getting profits from IPOs.
In this study, we tried to find out the risk perception of the investors in respect of IPO investment and the degree of influence of these factors affecting the risk perception of investors.

Literature Review
There are various studies have been done till now like the IPO's underpricing, effect of politics on IPOs, effects of management-board ties on IPO performance, institutional determinants of IPO, Internationalization and the IPO performance of new ventures , risk perception of IPO investors and the risk perception of a general investor etc.
A large number of studies have been conducted in India and abroad covering
different aspects of IPOs.
Madhusudhan V Jambodekar (1996) a study reveals that investors look for
safety of Principal, Liquidity and Capital appreciation in the order of importance.
Every individual is different from others due to various factors which include demographic factors, age, race and sex, education level, social and economic background; same is the situation with the investors. The most critical challenge faced by them is the investment decision. (Lubna Riaz, Ahmed Imran Hunjra and Rauf-i-Azam, 2012).
The decision-making behavior of an investor is affected by the attitude towards the risk as well as the way in which the investment risk is perceived by the investor. At different levels of perception towards risk, the individual investor thinks differently about his investment and makes decisions differently (Weber, E.U. and C. Hsee, 1998)

Objective of the study
1) To ascertain the level of risk perception of investors in shares with respect to equity investment through IPOs.
2) To find out the factors affecting the risk perception with respect to investment in equity shares through IPOs.
3) To find out the degree of influence of the factors affecting the risk perception with respect to investment in equity shares through IPOs.

Research Methodology
This is an exploratory study. This study is based on a survey of 100 respondents with the help of pretested questionnaire covering investors from Allahabad city. The purpose of the survey was to understand the factors affecting perception and level of awareness of investors towards IPO.
Universe and Sample:-The individual investor from Allahabad city constitute the sample for the study and sample size of 100 equity investors was selected from the clients of major brokers of Allahabad city.
Questionnaire Design: the questions were related to the items measuring the risk perception of IPO investors and factor influencing the decision making of investors i.e. whether to invest in IPOs or not.
Method of Data analysis and Interpretation: In this research study, statistical analysis is done using IBM's SPSS statistical software. Various tools of statistical analysis were used like mean, median, mode, standard deviation, percentages, Regression analysis and Reliability analysis.
Reliability analysis allows us to study the properties of measurement scales and the items that compose the scales. The Reliability Analysis procedure calculates a number of commonly used measures of scale reliability and also provides information about the relationships between individual items in the scale (ibm.com, 2014). Cronbach's alpha is a model of internal consistency, based on the average inter-item correlation. Cronbach's alpha was analyzed for reliability checking (which was found 0.819). Nunnaly (1978) has indicated that 0.7 to be an acceptable reliability coefficient.
An investor considers various factors while selecting an IPO. This range of factors includes monetary, risk and return, attractiveness of the offer etc. So from the informal discussion with few brokers and agents and referring to certain studies, all the relevant variables which investors consider important for selecting an IPO are considered. Seven factors were shortlisted which an investor usually considers while selecting an IPO for investment. Severity of risk in these factors was asked in questionnaire using 5 point Likert scale. Minimum score for any response would be 71=7 , showing the very low level of influence on decision making. Similarly, the maximum score would be 75=35 for a response showing the very high level of influence on decision making. The investors' scores were then divided into five categories which are as given below:
Range of scores
Of factors Category code
Assigned Interpretations
7 ' 12.6 1 Very Low Level Of influence
12.6 ' 18.2 2 Low Level Of influence
18.2 ' 23.8 3 Moderate Level Of influence
23.8 ' 29.4 4 High Level Of influence
29.4 ' 35 5 Very High Level Of influence
Analysis and Findings

On basis of the responses received from 100 investors, the detailed analysis is done using the above mentioned research methodology. The analysis, findings and interpretations of this research study are given below:
o Reliability of scale: First the reliability of scale is performed and the coefficient of Cronbach alpha was found to be 0.819 for 34 items considered for knowing the risk perception of investor. A high value of Cronbach alpha (0.819) shows the scale of measurement is highly reliable. It also represents that items are highly correlated. Because some of the items in the questionnaire are under the reverse scaling method to ensure accuracy of response, therefore, Cronbach's alpha value > 0.7 indicates that the items selected for measuring the risk perception of investors are actually measuring the latent variable (Nunnaly, 1978).
o Overall level of risk perception of the investors in equity through Initial Public Offering: Thirty Four statements were generated for measuring perception of investors towards IPO on a 5 point Likert scale.
After having responses for each 34 items, a score for each respondent was calculated by adding all the 34 items. For an investor having very low level of risk perception, the score will be 341=34 i.e. the minimum score. Similarly for an investor who ticks 5 for all would get 345= 170, the maximum score. The interval between 31 and 170 (that is 139) of investors' scores were then divided into five classes of risk perception.

Exhibit 1: Interpretation of risk perception in IPO investment
Risk Perception score Category code Remarks
34 ' 61.2 1 Very Low Level Of Risk Perception
61.2 ' 88.4 2 Low Level Of Risk Perception
88.4 ' 115.6 3 Moderate Level Of Risk Perception
115.6 ' 142.8 4 High Level Of Risk Perception
142.8 ' 170 5 Very High Level Of Risk Perception

After analyzing the data from 100 respondents, the result of overall risk perception of IPO investors was as presented in Table 1.
Table 1: Overall level of Risk Perception in IPO investment
Class of Risk Perception Frequency Percentage
Low level of risk perception 17 17.0
Moderate level of risk perception 62 62.0
High level of risk perception 21 21.0
Total 100 100.0

It was found that none of the respondents lie in the category of very low level of risk perception and very high level of risk perception. The highest numbers of respondents are in the moderate level of risk perception category i.e. 62%. Only 17% respondents lie in low level of risk perception. Thus most of respondents belong to either moderate or high level of risk perception to the equity investment through IPOs

o On calculating the mean of all the 34 items, it was found that the statement 'the IPO investment are not hassle free' got the highest mean of 3.66 which shows that the average investor consider this statement as a high risk factor to IPO investment. The statement which secured mean very near to the highest was 'less awareness of the complex rules of IPO' (its mean was found to be3.65). At the same time the statement regarding the unreliability on post office services get the least mean of 2.23 which makes it clear that majority of IPO investors do faith the post office services.
o The mean of the sum of scores of all the 34 statements for measuring the risk perception of IPO investors was found to be 105.80 which fall in the category of Moderate Level of Risk Perception. It shows that the average investor carries Moderate Level of Risk Perception in equity investment through IPOS.

o Analysis of factors influencing the risk perception of equity investors in respect of IPO: From the informal discussion with few brokers and agents and referring to certain studies, the seven factors are considered which investors consider important for selecting an IPO. These 7 factors are Past Performance of the company, Ratings (by CRISIL, ICRA, Etc.), Expert Advice, Industry Performance, Friends/broker Influence, Political Environment and Offer Price. It was found that among these seven factors, ratings given by credit agencies and past performance of company has low mean which shows these factors are considered more important by average number of investors. This is shown in Table 3.

Table 3: Mean of occurrence of the factors influencing risk perception of IPO investors
Factors N Mean
Past performance of company 100 1.49
Ratings (by CRISIL, ICRA, Etc.) 100 1.44
Expert Advice 100 1.63
Industry Performance 100 1.66
Friends/broker Influence 100 1.62
Political Environment 100 1.88
Offer Price 100 1.66

o On calculating the mean of all the 7 factors affecting risk perception (responses were taken on 5 point Likert scale), it was found that the factors Industry Performance, Ratings (by CRISIL, ICRA, Etc.) and Offer Price has high impact on risk perception on IPO investors as its mean are 3.72, 3.20 and 3.12 respectively i.e. the high among rest of factors. While the Political environment has the least mean of 2.43 and the least impact as well. The Table below depicts the mean of all the seven factors affecting risk perception of equity investor in respect of IPO.

Table 4: Mean of factors influencing risk perception of IPO investors
Factors Mean
Past performance of company 3.09
Ratings (by CRISIL, ICRA, Etc.) 3.20
Expert Advice 2.76
Industry Performance 3.72
Friends/broker Influence 2.72
Political Environment 2.43
Offer Price 3.12

o Regression Analysis: The regression analysis was done between independent variables age, gender, occupation, income level and qualification and the dependent variable 'sum of scores of 34 items' for the risk perception of IPO investors. The result obtained is in the table given below:
Table 4: Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
dimension0 1 .139a .019 -.022 13.035
a. Predictors: (Constant), Income level, Gender, Age, Occupation

From the above table it is clear that the independent variables like age, gender, occupation, income level and qualification has very less impact on the risk perception score of equity investors in respect of IPO.
Table 5: Coefficients
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 108.620 8.030 13.527 .000
Age -2.186 1.721 -.140 -1.271 .207
Gender .605 3.322 .019 .182 .856
Occupation -.481 1.008 -.057 -.477 .634
Income level .651 2.389 .035 .273 .786
a. Dependent Variable: sum of score of 34 items

Table 5 shows that age and occupation are negatively related with the risk perception score while gender and income level are positively related with the risk perception score of equity investors in respect of IPO.
The proposed Equation between age, gender, occupation, income level, the independent variables and the risk perception score of 34 items is:
RP = 108.62 ' 2.186 * a + .605 * g ' 0.481 * o + 0.651 * i
Where RP = Risk Perception score of an individual investor
a = Age of respondent
g = Gender of respondent
o = occupation of respondent
i = income level of respondent
Conclusion
In this study , it is found that majority of Equity investors in respect of Initial Public Offering have moderate to high level of risk perception. The overall risk perception of all respondents also showed that an average investor have moderate level of risk perception while going for investment in IPOs.
An investor consider IPO investment are not hassle free and its rules and regulation are complex to understand which reduces their confidence during making investments in IPOs. Now Postal and delivery services are not a concern of un reliability for IPO investors.
In this study, it has been revealed that the demographic factors like age, gender, occupation, income level and qualification does not have any significant effect on the risk perception carried by an individual investor of IPO.
The ratings given by various credit rating agencies and industry performance are some key factors which are considered by an individual investor at the time of buying an IPO.
Therefore, if the IPO investment in the equity market has to be improved in the area where the study was conducted then the policy makers and companies who want to bring their IPOs should focus on the facts revealed in the study.

References
1) Singh, R. (2012) 'Risk Perception of Investors in Initial Public Offer of Shares: A Psychometric Study', Asia Pacific Journal of Risk and Insurance, Volume 6, Issue 2
2) Singh, R. and Bhowal, A. (2008), 'Risk Perception-The Theoretical Kaleidoscope', Vanijya, Vol. 18, page 54 -63
3) Slovic, P. (1987). "Perception of Risk" Science, Vol. 236, pp. 280-285
4) Weber, E.U. and C. Hsee, 1998. Channel Contract. Behavior: The Role of Risk At-attitudes Risk Perceptions and Channel Members' Market Structures, Management Science, pp: 44.
5) http://pic.dhe.ibm.com/infocenter/spssstat/v20r0m0/index.jsp?topic=%2Fcom.ibm.spss.statistics.help%2Fidh_reli.htm
6) http://en.wikipedia.org/wiki/Main_Page
7) http://www.sebi.gov.in/faq/ipograding.html
8) http://beginnersinvest.about.com/od/investstrategiesstyles/a/aa081906a.htm
9) Nunnaly, J. (1978), 'Psychometric Theory', McGraw-Hill, New york
10) Wanyana, Barbara (2011), 'Investor Awareness, Perceived Risk Attitudes, And Stock Market Investor Behavior, A Case Of Uganda Securities Exchange'
11) Kiran, Ravi and Walia, Nidhi (May 2009), 'An Analysis of Investor's Risk Perception towards Mutual Funds Services', International Journal of Business and Management, Vol. 4, No. 5, page no. 106 ' 120.

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