Mandatory IPO Grading: Does it Help Pricing Efficiency?

Joshy Jacob and Sobhesh Kumar Agarwalla

No WP2012-12-07, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: The paper examines the market impact of a unique IPO certification recently introduced in India – mandatory grading of IPOs by a credit rating agency. The grading was expected to improve the IPO pricing efficiency by providing comprehensive issue-related information to the market, especially to the retail investors. The results indicate that grading has only a limited influence on the IPO demand of retail and institutional investors. The low grade issues appear to have weaker demand from investors relative to the ungraded IPOs. But there is no evidence to support IPO pricing improvement due to the introduction of IPO grading. This is contrary to the evidence reported by some earlier studies. This suggests the failure of grading as an IPO certification.

Date: 2012-12-26
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