Mumbai: Contrary to many popular studies, a study by Reserve Bank of India staff has found It is found that the operating performance does not deteriorate post IPOs. But, the focus should be on parameters like sales volumes or return on sales rather than assets, it said.

Most studies which have analysed a firms performance post an initial public offering -IPO, have concluded that profitability in terms of return on assets tends to decline post an IPO . But the RBI staff paper which examines how the operating performance of the Indian firms changed after their initial public offerings found that the operating performance does not deteriorate post IPOs, if a performance indicator like "profit" is normalised by sales volumes (i.e., return on sales) rather than assets (i.e., return on assets).

Normalisation is a process of adjusting values measured on different scales to a notionally common scale. Unlike a decline in return on assets showed in similar other studies, a stable return on sales is found in this study.

The RBI staff paper, analysed the long run operating performance of firms, post an IPO using ROA in the same industry. Empirical results indicated that such firms' return on assets (RoA) and turnover ratios (TOR) decline after issue while the ratio of net operating cash flows to total assets (RCFA) declines in the first-year post an IPO. But it recovers in subsequent years. At the same time, ROS does not show any significant decline.

Faster expansion of asset base of IPO firms immediately after issue largely explains the decline in asset-scaled performance variables such as ROA. The decline is not observed when profit is scaled by sales.