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Air pollution and initial public offering underpricing

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  • Xuehui Zhang
  • Jianhua Tan
  • Kam C. Chan

Abstract

We examine the impact of air pollution in a city in which an initial public offering (IPO) firm is located to its IPO underpricing. Our findings suggest that when air pollution is severe, the IPO underpricing is high. The results are robust to alternative metrics of air pollution and IPO underpricing, an instrumental variable approach, and a difference-in-differences research design. Additional analyses suggest that (1) seasoned firms located in severe air pollution cities have high crash risk, (2) seasoned firms located in severe air pollution cities have tightened financial constraints and makes more environmental investment, (3) IPO firms in severe air pollution cities have less analyst and institutional investor site visits. These findings support the underlying logic that air pollution worsens a firm’s information environment and financial constraint. We also find that the effect is more salient for IPOs with low analyst following, low institutional investor site visits, and high earnings management, corroborating the information asymmetry explanation of underpricing. Therefore, addressing environmental issues is important to public health as well as to capital formation.

Suggested Citation

  • Xuehui Zhang & Jianhua Tan & Kam C. Chan, 2021. "Air pollution and initial public offering underpricing," Applied Economics, Taylor & Francis Journals, vol. 53(39), pages 4582-4595, August.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:39:p:4582-4595
    DOI: 10.1080/00036846.2021.1904123
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    Cited by:

    1. Jiang, Dequan & Li, Weiping & Shen, Yongjian & Yu, Shuangli, 2022. "Does air pollution affect earnings management? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    2. Wu, Junfeng & Liu, Baohua & Chang, Samuel & Chan, Kam C., 2022. "Effects of air pollution on accounting conservatism," International Review of Financial Analysis, Elsevier, vol. 84(C).
    3. Tan, Zhidong & Yan, Lina, 2021. "Does air pollution impede corporate innovation?," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 937-951.
    4. Jiang, Dequan & Li, Weiping & Shen, Yongjian & Zhang, Ying, 2022. "Does air quality affect firms’ investment efficiency? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 1-17.

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