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Trust and IPO underpricing

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  • Li, Xiaorong
  • Wang, Steven Shuye
  • Wang, Xue

Abstract

This study examines the impact of trust on initial public offering (IPO) underpricing using a large sample of IPO firms in China. We find that firms in regions of high social trust have lower underpricing, consistent with the notion that IPO firms in low-trust regions have to offer greater underpricing to secure participation. This result is robust to a battery of sensitivity tests and after controlling for endogeneity using instrumental variables. We also find that the negative relation between social trust and underpricing is more prominent for small and growth firms, and firms in high-tech industries, consistent with trust playing a more important role in asymmetric information environments. This relation is less pronounced for firms with high insider ownership and political connections, suggesting that investors rely less on trust in these cases; it is less salient when firms are in regions with high quality legal institutions and high average education levels, consistent with trust being a substitute for formal institutions.

Suggested Citation

  • Li, Xiaorong & Wang, Steven Shuye & Wang, Xue, 2019. "Trust and IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 224-248.
  • Handle: RePEc:eee:corfin:v:56:y:2019:i:c:p:224-248
    DOI: 10.1016/j.jcorpfin.2019.02.006
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    Cited by:

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    5. Jackowicz, Krzysztof & Kozłowski, Łukasz & Podgórski, Błażej & Winkler-Drews, Tadeusz, 2020. "Do political connections shield from negative shocks? Evidence from rating changes in advanced emerging economies," Journal of Financial Stability, Elsevier, vol. 51(C).
    6. Mingsheng Li & Desheng Liu & Jing Zhang & Luxiu Zhang, 2021. "Volatile market condition, institutional constraints, and IPO anomaly: evidence from the Chinese market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 1239-1275, March.
    7. Ho, Kung-Cheng & Yen, Huang-Ping & Gu, Yan & Shi, Lisi, 2020. "Does societal trust make firms more trustworthy?," Emerging Markets Review, Elsevier, vol. 42(C).
    8. Xu, Xiaoyan, 2020. "Trust and financial inclusion: A cross-country study," Finance Research Letters, Elsevier, vol. 35(C).
    9. Jin, Ming & Yin, Mingmei & Chen, Zhongfei, 2021. "Do investors prefer borrowers from high level of trust cities? Evidence from China’s P2P market," Research in International Business and Finance, Elsevier, vol. 58(C).

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    More about this item

    Keywords

    Trust; IPO underpricing; Information asymmetry; Formal and informal institutions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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