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Cross-country IPOs: What explains differences in underpricing?

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  • Banerjee, Suman
  • Dai, Lili
  • Shrestha, Keshab

Abstract

We study the impacts of country-level information asymmetry, investors' home-country bias, effectiveness of contract enforcement mechanisms, and accessibility of legal recourse on IPO underpricing in 36 countries around the globe. We find evidence consistent with all four of our hypotheses. First, we find a positive and significant effect of country-level information asymmetry on IPO underpricing. Second, our empirical evidence is consistent with the agency-cost-based explanation of IPO underpricing. We find that lower cost to entice the block holders, measured by domestic investors' home-country bias, reduces IPO underpricing. Third, we find that effective contract enforcement mechanisms help to reduce IPO underpricing. Finally, we find a positive relation between the accessibility of legal recourse and IPO underpricing.

Suggested Citation

  • Banerjee, Suman & Dai, Lili & Shrestha, Keshab, 2011. "Cross-country IPOs: What explains differences in underpricing?," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1289-1305.
  • Handle: RePEc:eee:corfin:v:17:y:2011:i:5:p:1289-1305
    DOI: 10.1016/j.jcorpfin.2011.06.004
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    More about this item

    Keywords

    IPO underpricing; Information asymmetry; Home-country bias; Law enforcement; Litigation risk;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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