Cos' operating performance does not deteriorate post IPOs: RBI paper

Companies' operating performance does not deteriorate post initial share-sales if profit is normalised by sales volumes rather than assets, says a research paper posted on the RBI website.
Considering an IPO as a major event in the life of a firm, the paper found a stable return on sales after the public issue.
"It is found that the operating performance does not deteriorate post IPOs, if a performance indicator like 'profit' is normalised by sales volumes (return on sales) rather than assets (return on assets)," according to the paper titled "Operating performance of IPO firms after issue in India".
The study, based on data of non-financial firms, which floated 413 IPOs during April 1, 2000 to March 31, 2011, focused on their long-term operating performance for which it uses minimum three years post-issue data.

The views expressed in the paper are those of the authors and not of the RBI.
The study said the post-issue operating performance of IPO firms measured as return on asset and turnover ratio records a sharp decline. However, the decline in ratio of operating cash flow with total assets is confined to the issue year and year after the issue only.

It said initial decline could be on account of enlarged capital expenditures, which firms resort to after the initial public offer (IPO).
"We also find that as far as return on sales and sales growth are concerned there is no statistically significant change after issue," the paper noted.

The paper is authored by Avdhesh Kumar Shukla, assistant adviser in the department of economic and policy research at RBI, and Tara Shankar Shaw, a member of faculty at the department of humanities and social sciences in Indian Institute of Technology Bombay.
Further, the study also found that IPO firms continue to outperform "matched firms" from the same industry when compared in terms of change in relevant operating variables.
"A battery of tests conducted after controlling for firms various attributes such as family-control, business group ownership, size, expenditure on R&D and advertisement and liquidity, etc, indicate that decline in performance cannot be completely explained by agency relationship and entrenchment hypothesis," it said.