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Cultural distance and foreign IPO underpricing variations

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  • Cai, Kelly
  • Zhu, Hui

Abstract

This paper examines the impact of cultural distance on the underpricing of initial public offerings issued by foreign firms in the United States (foreign IPOs). Using a sample of 503 foreign IPOs from 27 countries for the 1980–2012 period, we find that greater cultural differences between U.S. investors and foreign domiciled issuers increase the underpricing of foreign IPOs. Our findings are robust after controlling for a country's legal environment, financial development, and corporate tax rates. We also find that the presence of prior public equity issues in the home market moderates the positive impact of cultural distance due to the increased transparency and visibility of foreign firms among U.S. investors. Our results suggest that cultural differences influence IPO underpricing through an information asymmetry channel and visibility reduces information asymmetry between foreign issuers and U.S. investors, which, in turn, mitigates the positive impact of cultural distance on the underpricing cost.

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  • Cai, Kelly & Zhu, Hui, 2015. "Cultural distance and foreign IPO underpricing variations," Journal of Multinational Financial Management, Elsevier, vol. 29(C), pages 99-114.
    • Handle: RePEc:eee:mulfin:v:29:y:2015:i:c:p:99-114
    DOI: 10.1016/j.mulfin.2014.11.003
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    4. Gupta, Deepika R. & Veliyath, Rajaram & George, Rejie, 2018. "Influence of national culture on IPO activity," Journal of Business Research, Elsevier, vol. 90(C), pages 226-246.
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    More about this item

    Keywords

    Cultural distance; IPO underpricing; Information asymmetry; Visibility;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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