Title: Signalling by IPO grading: an empirical investigation

Authors: Seshadev Sahoo

Addresses: Finance and Accounting Area, Indian Institute of Management Lucknow, Room No-213, Chintan Block, Prabandh Nagar, Off-Sitapur Road, Lucknow-226013, India

Abstract: This paper investigates the efficacy of IPO grading as certification. We find that subscription rate varies across grades (i.e., grades = 1, 2, 3, 4, and 5). Using a dataset of 116 IPOs issued during 2007-2011, we find higher graded IPOs are less underpriced, and invite more subscription across different investor group. However, grading has little impact on post listing price volatility. Hence, the role of IPO grading in providing an objective assessment of the quality of the issue from the viewpoint of controlling after market volatility is doubtful. Further, distribution of penultimate subscription rate of different investor groups across grades suggests that non-institutional retail investors are poor in reading different grade values. This study contributes to the growing body of certification hypothesis for IPOs. This study provides a new direction to the study of underpricing, subscription rate and volatility for the Indian IPOs when grading of IPOs was made binding.

Keywords: IPO grading; initial public offering; underpricing; market volatility; subscription rate; venture capital; parent group; investment bank prestige; IBP; signalling; investment banks; certification; India.

DOI: 10.1504/AAJFA.2016.074553

Afro-Asian Journal of Finance and Accounting, 2016 Vol.6 No.1, pp.68 - 85

Accepted: 09 Nov 2015
Published online: 02 Feb 2016 *

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