Mandatory IPO Grading: Does It Help Pricing E ciency?

Abstract

The paper examines the market impact of a unique IPO certi cation recently introduced in India mandatory grading of IPOs by a credit rating agency. The grading was expected to improve the IPO pricing e ciency by providing comprehensive issue-related information to the market, especially to the retail investors. The results indicate that grading has only a limited in uence 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 certi cation.