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Credit ratings and IPO pricing

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  • An, Heng (Hunter)
  • Chan, Kam C.
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    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 in reducing value uncertainty of the issuing firms as well as information asymmetry in the IPO markets.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 14 (2008)
    Issue (Month): 5 (December)
    Pages: 584-595

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    Handle: RePEc:eee:corfin:v:14:y:2008:i:5:p:584-595

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: IPO underpricing Price revision Credit rating Information asymmetry Selection bias;

    References

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    Citations

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    Cited by:
    1. Ting-Kai Chou, 2013. "Information content of credit ratings in pricing of future earnings," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 217-250, February.
    2. Chou, Ting-Kai & Cheng, Jia-Chi, 2012. "Credit ratings and excess value of diversification," Journal of Empirical Finance, Elsevier, Elsevier, vol. 19(2), pages 266-281.
    3. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Time-varying exchange rate exposure and exchange rate risk pricing in the Canadian Equity Market," Economic Modelling, Elsevier, vol. 37(C), pages 451-463.
    4. McCahery, Joseph & Schwienbacher, Armin, 2010. "Bank reputation in the private debt market," Journal of Corporate Finance, Elsevier, Elsevier, vol. 16(4), pages 498-515, September.
    5. Karampatsas, Nikolaos & Petmezas, Dimitris & Travlos, Nickolaos G., 2014. "Credit ratings and the choice of payment method in mergers and acquisitions," Journal of Corporate Finance, Elsevier, Elsevier, vol. 25(C), pages 474-493.
    6. Chang, Chih-Hsiang, 2011. "IPO underpricing: A social comparison perspective," International Review of Economics & Finance, Elsevier, vol. 20(3), pages 367-375, June.
    7. Jacob, Joshy & Agarwalla, Sobhesh Kumar, . "Mandatory IPO Grading: Does it Help Pricing Efficiency?," IIMA Working Papers WP2012-12-07, Indian Institute of Management Ahmedabad, Research and Publication Department.

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