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Legal protection and underpricing of IPOs: Evidence from China

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  • Liu, Jianlei
  • Uchida, Konari
  • Gao, Ruidong

Abstract

Chinese data enable investigation of the relationship between underpricing of initial public offerings (IPOs) and legal protection with controlling for time-invariant characteristics of regions. Our investigation of Chinese IPOs between 1997 and 2009 shows that firms from a province with more developed legal framework experience less underpricing after controlling for time-invariant, province-fixed effects. We also find that the extent of underpricing is decreased by the strength of legal protection of property rights. Importantly, these tendencies are evident only after the introduction of a book-building system, which provides issuers and underwriters with discretion on offering price determination. These results offer robust evidence that legal protection mitigates ex ante uncertainty regarding property rights protection, and thereby, reduces underpricing.

Suggested Citation

  • Liu, Jianlei & Uchida, Konari & Gao, Ruidong, 2014. "Legal protection and underpricing of IPOs: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 27(C), pages 163-187.
  • Handle: RePEc:eee:pacfin:v:27:y:2014:i:c:p:163-187
    DOI: 10.1016/j.pacfin.2014.02.006
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    Keywords

    IPO; Underpricing; Legal protection; China;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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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