Does IPO grading convey future performance? Evidence from Indian IPOs

Abstract

Purpose: This paper tests whether the IPO grading mechanism captures the fundamentals of the firm by examining the long-run operating performance of IPOs.

Design/methodology/approach: To measure the operating performance of the IPO industry, the industry-adjusted PBDITA scaled by total assets was used as a proxy. The multivariate analysis was employed to find the impact of grading on operating performance

Findings: The findings reveal that the grading has a significant and positive impact on the operating performance than that of the non-graded IPOs. As IPO grading is based on the fundamentals of the firm, we assume that the high-grade IPOs' operating performance would be better than that of low-grade IPOs, but the high-grade IPOs' operating performance doesn’t significantly differ from that of low-grade IPOs.

Originality/value: Since IPO grading became mandatory, most of the research was focused on the pricing and stock performance.  This study contributes to the literature by studying the IPO grading impacts on the long-run operating performance of IPOs, which was ignored by previous studies.