How does a pre-IPO credit rating affect IPO underpricing before and after financial crisis? US evidence

Abstract

This Thesis studies US IPOs with a credit rating focus. Especially I am researching IPO underpricing between two groups during 1980 and 2018: companies having a credit rating before going public and companies going public without a credit rating. I am arguing that companies having a credit rating before public listing will be underpriced less than other companies because having a credit rating before IPO corrects information asymmetries between the listing firm and an investor.

This study measures underpricing by the difference between IPO price and first day closing price. I expect that the “less underpricing” -effect of pre-IPO rated firms has faded away after the financial crisis of 2008 since the credit rating agencies played a major role in the crisis. I also argue that the Sharpe ratios are better for companies with a pre-IPO credit rating for a period after the IPO. I will start my empirical research by studying what are the characteristics for a company that does have a credit rating.

I find that companies having pre-IPO credit rating before IPO are statistically significantly less underpriced before 2008 than other companies and companies listing post-financial crisis are not underpriced less than other companies. The level of the pre-IPO credit rating does not influence IPO underprice. Over time, the volatilities are also lower among the pre-IPO rated companies but so seem the returns to be. Thus, Sharpe ratios for companies rated before listing. OLS regressions for first 30-, 60-, 120- and 365-day periods does not result any statistically significant coefficient for pre-IPO rated dummy.