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.

Initial Public Offerings (IPOs) are distinguished by high levels of information asymmetry. Many firms which plan to go public often use various certification mechanisms such as highquality underwriters, venture capital affiliations, high-quality auditors and lockup agreements to reduce information asymmetry and to signal their quality to potential investors. The pricing and performance of IPOs is one of those experimental mechanisms used to attract many researchers in finance. The empirical evidence on the pricing of IPOs is a puzzle to those who believe in efficient financial markets. Though there are extensive studies done on the abnormal initial returns provided by the IPOs, there is no study done on the price cap phenomenon during the first days of trading. The preeminent purpose of this study is to fill this gap using not one, but three regulation changes over the covered period. Regulations and listing requirements have played a major role in the life of the IPOs. The request for a stock exchange listing is on the basis of an introduction prospectus, the contents of which are subject to regulations, and which is generally filed a few months before the admission date. In order to compile the IPO prospectus, lawyers, together with the underwriting bank, examine the company with regard to its legal, financial and commercial aspects. The higher trading liquidity of a firm increases its value (Amihud and Mendelson, 1986) and curtails transaction costs in future equity raising (Ibbotson and Ritter, 1995). The general perception in promoting trading (Aggarwal, 2003) and the process of a firm’s IPO is characterized by the expansion of its ownership structure (Pham et al., 2003) to include a much larger number of outside investors leading to higher trading liquidity (Fidrmuc et al., 2006). Large trading volume in the IPOs is mostly due to the flipping activity and ownership structure at the Bombay Stock Exchange (BSE) (Bansal and Khanna, 2012a, 2012b, 2012c, 2012d and 2012e). Pricing mechanism at the BSE was tested by Bansal and Khanna (2012a).

Financial Risk Management Journal, Do, High, Credit Rating, IPOs, Influence, Determinants, Underpricing, Logit, Analysis.