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

-- Rohit Bansal and Ashu Khanna

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.

© 2012 IUP. All Rights Reserved.

Liquidity Risk and Interest Rate Risk on Banks: Are They Related?

--Cinzia Baldan, Francesco Zen and Tobia Rebonato

The present study aims to ascertain whether a relationship exists between liquidity risk and the interest rate risk of credit institutions. By analyzing the balance sheet of a small Italian bank during the years 2009 and 2010, its liquidity profile, the variables that influenced its dynamics and their effects on the bank’s global management, with particular attention to the interest margin and the interest rate risk in the Banking Book, were outlined. Gaps identified in literature were filled by shedding light on how a set of decisions designed mainly to reduce liquidity risk and comply with the new parameters established by the Basel III Framework enables a more effective management of the regulatory capital and helps the bank to achieve a solid balance between profitability and solvency. The main findings of the study demonstrate that the bank succeeded in modifying its liquidity profile in order to comply with the incoming constraints imposed by the Basel III framework; the actions taken to reduce the liquidity risk also lowered its interest margin, but also enabled the bank to reduce the amount of capital absorbed by the interest rate risk, giving rise to a globally positive effect.

© 2012 IUP. All Rights Reserved.

Can Portfolio Diversification Increase Systemic Risk?: Evidence from the US and European Mutual Funds Market

-- Claudio Dicembrino and Pasquale Lucio Scandizzo

This paper tests the hypothesis that portfolio diversification can increase the threat of systemic financial risk. The paper first provides a theoretical rationale for the possibility that systemic risk may be increased by the proliferation of financial instruments that lead operators to hold increasingly similar portfolios. Secondly, the paper tests the hypothesis that diversification may result in increasing the systemic risk by analyzing the portfolio dynamics of some of the major world open funds.

© 2012 IUP. All Rights Reserved.