Credit Ratings and the Effect on IPO Underpricing: An Empirical Analysis of IPO Returns in the U.S. Market from 1986 to 2016

Stef Alfrink & Bruno Munnikhof

Student thesis: Master thesis


We analyze the effect of pre-IPO credit ratings on underpricing found in initial public offerings, through its effect on value uncertainty and information asymmetry among IPO market participants. Based on a sample of U.S. common share IPOs between 1986 and 2016, we find that firms with credit ratings experience significantly lower levels of underpricing than firms without credit ratings. We argue that there exists an endogenous relation between having a credit rating and IPO underpricing. Therefore, we abandon the conventional OLS regression method, and adopt the more sophisticated Maddala (1986, p.117) and generated instrumental variable approaches. The two methods yield similar results, indicating that the choice of a specific estimation method does not drive our findings. In line with prior literature, our result suggests that credit ratings reduce information asymmetry and firm value uncertainty of investors.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages84