Impact of Auditor and Underwriter Reputation on Underpricing of SME IPOs in India

Abstract

Small and medium enterprises (SMEs) being relatively new, young and with little operating history tends to suffer from the problem of information asymmetry and ex ante uncertainty. This problem can be reduced through the use of various signals in the initial public offering (IPO) process. Hence, this study attempts to shed some light on the signalling role of prestigious auditors and underwriters and their interacted effects on IPO returns in an emerging market like India. Cross-sectional data comprising of final 286 SME IPOs issued during February 2012–March 2018 listed on the BSE SME platform and NSE EMERGE have been taken into consideration. Multiple regression analysis has been used to empirically test the signalling role. The results reveal that underwriter reputation helps in reducing information asymmetry and signals firm quality to investors. Underwriter reputation documents a positive relationship while auditor reputation lacks statistical significance. The negative relation of interaction effect of auditors and underwriters reveal that underwriter reputation plays a significant role in positively influencing investors’ perception and assisting them in taking investment decisions.