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Does the legal system affect the cost of external financing? Evidence from IPO underpricing of foreign firms listed in US stock markets

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  • Shaokang Wang
  • Jing Jiang

Abstract

To study the effect of the legal system on the cost of external financing, we examine the degree of underpricing of the IPOs by foreign companies listed in the USA. We find that firms from highly corrupted countries have larger IPO underpricing. The quality of the home countries' public law enforcement reduces the degree of IPO underpricing. In particular, the criminal sanction for violations of securities laws is the most significant factor in reducing underpricing. The evidence shows that even when a non-US firm meets sophisticated US regulations and goes public in a US exchange, the degree of underpricing is still influenced by the legal and judicial system in the home country. Following La Porta et al. (2000a), we provide evidence against the functional convergence hypothesis (Coffee, 1999 and 2002).

Suggested Citation

  • Shaokang Wang & Jing Jiang, 2019. "Does the legal system affect the cost of external financing? Evidence from IPO underpricing of foreign firms listed in US stock markets," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 18(2), pages 186-214.
    • Handle: RePEc:ids:ijecbr:v:18:y:2019:i:2:p:186-214
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