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How a pre-IPO audit committee improves IPO pricing efficiency in an economy with little value uncertainty and information asymmetry

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  • Kao, Lanfeng
  • Chen, Anlin

Abstract

We examine the effect of a pre-IPO audit committee on IPO pricing from the perspectives of information asymmetry and agency problems. We propose a bargaining power hypothesis to disentangle the information asymmetry explanation (financial reporting quality) from the agency problems explanation (underwriter bargaining power) on IPO pricing. IPO underpricing can be reduced by increasing the financial reporting quality under information asymmetry and/or by decreasing the underwriter bargaining power under agency problems. An audit committee can raise the quality of financial reporting and reduce the bargaining power of underwriters. With a pre-IPO market, the IPO markets in Taiwan have little information asymmetry, thus leading to the weak importance of reducing information asymmetry. We show that the establishment of a pre-IPO audit committee improves IPO pricing efficiency by reducing underwriter bargaining power rather than by raising the quality of financial reporting in Taiwan.

Suggested Citation

  • Kao, Lanfeng & Chen, Anlin, 2020. "How a pre-IPO audit committee improves IPO pricing efficiency in an economy with little value uncertainty and information asymmetry," Journal of Banking & Finance, Elsevier, vol. 110(C).
    • Handle: RePEc:eee:jbfina:v:110:y:2020:i:c:s0378426619302626
    DOI: 10.1016/j.jbankfin.2019.105688
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    Cited by:

    1. Kao, Lanfeng & Chen, Anlin & Krishnamurti, Chandrasekhar, 2020. "Outcome model or substitute model of D&O insurance on IPO pricing without information asymmetry before issuance," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    2. Dunbar, Craig G. & King, Michael R., 2023. "Syndicate structure and IPO outcomes: The impact of underwriter roles and syndicate concentration," Journal of Corporate Finance, Elsevier, vol. 79(C).
    3. Liu, Haiming & Chiang, Yao-Min, 2022. "Confucianism and IPO underpricing," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    4. Chi, Yeguang & He, Jingbin & Ma, Xinru & Wu, Fei, 2023. "Air pollution and institutional investors' valuation bias during initial public offerings," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    5. Wang, Tong & Zhao, Sheng & Zhou, Mengqiu, 2022. "Does soft information in expert ratings curb information asymmetry? Evidence from crowdfunding and early transaction phases of Initial Coin offerings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    6. Kao, Lanfeng & Chen, Anlin & Lu, Cheng-Shou, 2022. "Retail investor attention and IPO prices with a pre-IPO market," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 416-432.

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