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Do Differences in Institutional and Legal Environments Explain Cross-Country Variations in IPO Underpricing?

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Abstract

We empirically analyze the determinants of Initial Public Offering (IPO) underpricing using panel data for 29 countries over the period 1988-2005. Our hypotheses stress the importance of institutional and legal factors in explaining cross-country variations. We find that increased protection of shareholders and greater accounting transparency contribute negatively to variations in underpricing. When more information is available price discovery is facilitated, allowing for more effective corporate governance. Moreover, when equity markets perform well, investors anticipate companies and investment banks to time the market and require higher underpricing in return. Overall, we conclude that better investor protection and better institutional environments reduce the perceived risk of investing, and attenuate the problem of asymmetric information, thereby causing lower underpricing across countries.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 07-172.

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Length: 56 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:kof:wpskof:07-172

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Keywords: IPO underpricing; institutions; legal infrastructure; panel data;

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