International BusinessShare price volatility inversely proportional to IPO grade
Volatility in share price of a company is inversely proportional to the grade assigned to its initial public offer, as firms with high grade show relatively less fluctuations in share prices, a study said.
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According to an analysis by the research arm of rating agency Crisil, the companies with a lower initial public offer (IPO) grade showed far greater share price volatility than the companies with a higher grade.
The absolute price movement was the highest, of as much as 12 times in case of companies with lower IPO grade of one out of five (indicating poor fundamentals). The least movement of just five times was witnessed for companies with better grade of four (indicating above average fundamentals), the Crisil Research analysis said.
Similarly, firms with high IPO grade of four were less volatile (103 per cent) than firms with lower ISO grade of one and two (around 142 and 158 per cent movement respectively).
IMO gradings focus on the fundamentals of a company and are independent of the IPO issue price, the study added.
The rating agency"s analysis is based on 52 listed IPO graded firms and covers IPOs graded by all the rating agencies between May 2007 and August 2009.
"Since IPO gradings reflects fundamentals, the capacity of higher IPO graded companies to withstand a downturn is far higher than the companies with lower IPO grades," Chetan Majithia Head-Equities Crisil Research said.