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As the financial needs of a corporate entity expand, a change in the capital structure takes
place, which may lead to change in the ownership structure. As per pecking order theory, first
the retained earnings are ploughed, thereafter debt instruments are issued and finally equity
instruments are issued (Myers, 1984; Graham and Harvey, 2001; and Zhao et al., 2004).
Raising finance from public through equity instruments leads to change in ownership structure
and performance of corporate entities also change after such public issue (Mayur and Kumar,
2009).
As of now, it has been noticed that listing, market usually pays more price in comparison
to issue price of an IPO (Rock, 1986; Ritter, 1991; Ghosh, 2005; and Hasan et al., 2013).
Initial days’ return is influenced by several behavioral, factual, micro and macro variables.
Sentiments of avid investors of Initial Public Offers (IPOs) have also influenced the initial
days’ return and it is likely to be quelled by the factual financial information given in the
prospectus of a corporate entity. The disclosures in the prospectus always remain in the same
format, whether it is the public offer priced through book building or fixed price mechanism.
In India, book built IPOs were found to be least underpriced in contrast to those that were
floated by adopting other pricing mechanisms (Bubna and Prabhala, 2007). But the grade of
equity instruments is not associated with underpricing. Instead of retail investors, informed
institutional investors make use (Khurshed et al., 2011) of grading content. The present study is an attempt to explore the role of accounting information toward the severity of
underpricing in the context of graded book built IPOs.
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