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An international look at the lawsuit avoidance hypothesis of IPO underpricing

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  • Lin, Hui Ling
  • Pukthuanthong, Kuntara
  • Walker, Thomas John

Abstract

We examine the relationship between IPO underpricing and litigation risk in an international setting using a sample of 13,759 firms that went public across 40 countries between 1991 and 2011. While the majority of single-country studies do not find support for the lawsuit avoidance hypothesis, we find a significant positive relationship between litigation risk and underpricing in a cross-country framework. Contrary to all single-country legal liability studies outside the U.S. and consistent with the U.S. studies of Tiniç (1988) and Lowry and Shu (2002), our empirical results support the insurance effect of the lawsuit avoidance hypothesis in an international context. Our findings imply that the degree of litigation risk in a given country affects the level of underpricing for firms that go public in that country. We conclude that differences in legal risk factors can partially explain differences in underpricing across countries.

Suggested Citation

  • Lin, Hui Ling & Pukthuanthong, Kuntara & Walker, Thomas John, 2013. "An international look at the lawsuit avoidance hypothesis of IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 56-77.
  • Handle: RePEc:eee:corfin:v:19:y:2013:i:c:p:56-77
    DOI: 10.1016/j.jcorpfin.2012.10.003
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    1. repec:eee:pubeco:v:155:y:2017:i:c:p:64-73 is not listed on IDEAS
    2. 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.
    3. Dorsman, André & Gounopoulos, Dimitrios, 2013. "European Sovereign Debt Crisis and the performance of Dutch IPOs," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 308-319.
    4. Shaio Yan Huang & Chao-Hsiung Lee & Lee-Hsien Pan & Bich Hanh Nguyen Thi, 2016. "IPO Initial Excess Return in an Emerging Market: Evidence from Vietnam’s Stock Exchanges," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-23, June.
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    7. Luo, Changqing & Ouyang, Zisheng, 2014. "Estimating IPO pricing efficiency by Bayesian stochastic frontier analysis: The ChiNext market case," Economic Modelling, Elsevier, vol. 40(C), pages 152-157.
    8. Klein, Peter G. & Wuebker, Robert & Zoeller, Kathrin, 2016. "Relationship banking and conflicts of interest: Evidence from German initial public offerings," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 210-221.

    More about this item

    Keywords

    Initial public offerings; Securities regulation; Securities litigation;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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