Credit Ratings and IPO Pricing
Posted: 31 Jan 2008 Last revised: 2 Jan 2011
Date Written: December 28, 2008
Abstract
We examine the effects of credit ratings on IPO pricing. The evidence from U.S. common share IPOs during 1986-2004 shows that when firms go public, those with credit ratings are underpriced significantly less than firms without credit ratings. Credit rating levels, however, do not have a significant effect on IPO underpricing. The existence of credit rating reduces uncertainty about firm value. It is the value certainty that matters, not the value per se. Credit ratings also reduce the degree of price revision during the bookbuilding process and the aftermarket volatility in the post-IPO period. The evidence suggests that credit ratings convey useful information which reduces value uncertainty of the issuing firms as well as information asymmetry in the IPO markets.
Keywords: IPO underpricing,Price revision, Credit rating, Information asymmetry, Selection bias
JEL Classification: G24, G14, G32
Suggested Citation: Suggested Citation