Institutional Blockholder Networks and Corporate Acquisition Performance

Abstract

There is little evidence to show that primary capital markets allocate capital to the most profitable uses. We bridge this gap by examining Indian IPOs. When market regulations are weak, more firms go public and firms with poor fundamentals raise more capital. Over time, primary markets do not necessarily allocate more capital to firms with higher profitability or to those with more growth opportunities. However, the probability of failure declines and the liquidity of IPOs improves. Our results suggest that capital market reforms are not uniformly effective in directing investments to firms with higher investment efficiency.