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Underpricing of IPOs and Legal Frameworks Around the World

Author

Listed:
  • Engelen Peter-Jan

    (Utrecht University)

  • van Essen Marc

    (RSM Erasmus University)

Abstract

This paper analyzes the relationship around the world between the underpricing of IPOs and a countrys legal framework. From the theoretical research we expect a negative relationship between a higher level of investor protection (and other measures of a countrys legal framework) and the level of underpricing. The empirical results support our expectations and show a negative relationship between a countrys legal framework and the underpricing of IPOs. In this way, this study adds to the growing law and finance literature. Firms in countries with stronger investor protection (and other measures of the countrys legal framework) have, ceteris paribus, lower costs to go public, and thus an international advantage in comparison to firms from other countries with less developed legal frameworks.

Suggested Citation

  • Engelen Peter-Jan & van Essen Marc, 2008. "Underpricing of IPOs and Legal Frameworks Around the World," Review of Law & Economics, De Gruyter, vol. 4(1), pages 419-441, December.
  • Handle: RePEc:bpj:rlecon:v:4:y:2008:i:1:n:20
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    References listed on IDEAS

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    1. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    2. Jarrell, Gregg A, 1981. "The Economic Effects of Federal Regulation of the Market for New Security Issues," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 613-675, December.
    3. Sonin, Konstantin, 2003. "Why the rich may favor poor protection of property rights," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 715-731, December.
    4. Baron, David P, 1982. " A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues," Journal of Finance, American Finance Association, vol. 37(4), pages 955-976, September.
    5. Ritter, Jay R, 1984. "The "Hot Issue" Market of 1980," The Journal of Business, University of Chicago Press, vol. 57(2), pages 215-240, April.
    6. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
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    Cited by:

    1. Espenlaub, Susanne & Goyal, Abhinav & Mohamed, Abdulkadir, 2016. "Impact of legal institutions on IPO survival: A global perspective," Journal of Financial Stability, Elsevier, vol. 25(C), pages 98-112.

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