Listing day volatility of companies coming with IPOs is on an average 13 times higher finds FE study. A comparison of the price movement of all stocks that debuted in the secondary market since 2010 indicate that on the listing day there is significantly higher volatility in these stocks compared to the volatility of other listed stocks of the same industry as well as of that of the broader market.
Market regulator is currently mulling options such as pre-open session to reduce volatility on day one of listing.
For instance, the first day volatility of 10 infrastructure and engineering companies that came with an IPO in last two years ranged from 9% to 31% while the volatility in the BSE Capital goods index on the same day ranged between 0.7% to 3%. Or on an average it was 13 times higher.
For the comparison we measured the volatility of a stock by comparing the difference between its high and low price on the listing day as a percentage of the price at which the IPO opens.
We found that for as many as 26 out of the set of 74 companies that came with IPO since 2010, the volatility was more than 25%. Further, for almost two third of such companies the listing volatility was more than 15%.
While experts attribute such high listing day volatility to the process of price discovery, they also feel that absence of any mechanism that can curb the wide price swings for stocks entering the secondary add to the first day volatility. Similar discrepancy were also observed for companies from realty and IT sectors that came out with an IPO since 2010.
There are instances, as the case with Shekhawati polyster and Finotex Chemicals , in which the price swing (difference between high and low) on the listing day was two times its open price.
Says Girish Nadkarni, ED and Head, Equity capital markets ? When a company debuts in the secondary market through an IPO, the first day price movement is a result of price discovery. The participation of various types of investors, including day traders and arbitragers besides the retail investors result into deciding the listing price of a stock?.
According to B Madhuprasad, Vice Chairman, Keynote ?The price movement of a stock entering the secondary market on the first day reflects the price discovery. However, in absence of circuit filters that can freeze the price of the listing company in case of an abnormal trading activity, sometimes the volume at a debuting counter is two to three times the issue size.?
This, experts say, is because many investors try and take advantage of the first day price movement of the listing companies. ?Even if they are genuinely interested in buying the stock, they prefer to exit their IPO allotment on the first day and buy the same scrip at a later date when it is available at a cheaper price,? added Madhuprasad.