Artha: Journal of Business and Finance

Signalling Quality Through Underpricing: A Bayesian Game-Theoretic Analysis of Indian Startup IPOs (2020– 2024)

Sudam Majhi

Keywords: IPO underpricing, ignalling games, Bayesian game theory, Indian startups, equity capital markets

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Abstract

The period between 2020 and 2024 saw an unprecedented boom in Indian startup initial public offerings (IPOs), which included listings by Zomato, Nykaa, Paytm, Mamaearth, and other venture-backed companies. Most of these IPOs showed significant underpricing — a process of fixing the offer price less than the anticipated market-clearing price — resulting in huge first-day appreciation for investors. Although underpricing would seem to be harmful to issuers, theory in signalling explains that good-quality firms would underprice for the purpose of signalling their quality credibly in asymmetric information markets. Using a Bayesian signalling game framework, this paper models IPO underpricing. Issuers are classified as high- or low-quality based on unobservable fundamentals. While low-quality issuers are discouraged by the expense of imitating such a strategy, high-quality issuers may strategically underprice in anticipation of long- term reputational benefits and improved aftermarket performance. Data on offer prices, listing prices, underpricing percentages, and post-listing returns from Indian startup initial public offerings (IPOs) from 2020 to 2024 are used to test the model. According to the results, underpricing works well as a signal in industries with a lot of information asymmetry, like technology. Issuers, practitioners of equity capital markets (ECM), and emerging market policymakers can all benefit from the study's conclusions.

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