Modifier effects of country-level transparency on global underpricing difference: New hierarchical evidence

Even though empirical evidence on IPO underpricing documents substantial variations across nations, existing literature primarily neglects the simultaneous direct and indirect influences of formal institutional quality. Here, we examine if the perceived differences in IPO underpricing in the global IPO market are due to: direct effect of inter-temporal changes in transparency across countries; indirect effect of inter-temporal changes in country-level transparency on IPO underpricing; or due to both. We employ 10,212 IPO-issuing firms over 22 years covering 12 advanced and 10 emerging countries with heterogeneous formal intuitional backgrounds. The findings demonstrate that differences in country-level characteristics account for 22%, 5%, and 25% of the deviations in IPO underpricing between all G20, developed and developing countries, respectively. By employing time-variant transparency proxies, we explain up to 34% of the variability in IPO underpricing across G20 countries. We observe conclusive evidence showing that country-level transparency indirectly influences underpricing variation by moderating the relationships between the incentive of IPO issuers, underwriter reputation, and the link between ex-ante uncertainty and underpricing. Both direct and indirect effects of formal institutional quality are important in explaining underpricing differences within developing equity markets compared to developed ones. We outline several policy-oriented contributions.