Do High Credit Rating IPOs Influence the Determinants of Underpricing? – A Logit Analysis

The Indian capital market regulator, Securities and Exchange Board of India (SEBI) introduced a unique accreditation mechanism for Initial Public Offerings (IPOs) in 2007, whereby all IPOs have to undergo mandatory quality grading by independent rating agencies. In this paper, we claim that such an objective - autonomous and exogenous certifying mechanism - provides a better opportunity to test the well-established credit rating hypothesis, especially in the context of the emerging markets with institutional voids. Employing a sample of 142 Indian IPOs (January 2007 to December 2011), we also experiment ex-ante uncertainty with the efficacy of IPO grading mechanism. Grading decreases IPO underpricing and positively influences the demand of retail investors, issue size, earnings before interest and dividend, long-term debt-equity, equity ratio and profit to the book value ratio. Grading also diminishes the number of shares offered, debt-equity ratio and earnings before interest, dividend and tax, fixed assets ratio, and has much impact on ex-ante uncertainty. Notwithstanding, grading does not affect the subscription rate, offer timing (difference in days between offer days and listing days), firm's age, debtors turnover ratio, creditor payment method, cash to price earnings ratio, Post-Issue Promoter's Holding (PIPH), interest coverage ratio, inventory turnover ratio, market capitalization, price earnings ratio, return on capital employed and return on net worth of the IPOs. IPO grading is important to capture firm size, business group affiliation and firm's quality of corporate governance. Our findings reveal that in the emerging markets, a regulator's role to signal the quality of an IPO contributes to market welfare