Was SOX Effective in Reducing Asymmetric Information? The Case of IPO Underpricing

Abstract:     
This paper examines the impact of SOX on the pricing of IPOs in the US. SOX represents a legal framework intended to increase transparency, reliability and accountability of listed companies. Therefore, we hypothesize that SOX via reducing asymmetric information has a dampening effect on IPO underpricing. In fact, as a first result we show that the level of offer price adjustments has significantly decreased after the introduction of SOX. Second, we record a highly significant reduction in underpricing. Third, we find that after the introduction of SOX, the reduction in underpricing can be fully explained by the adjustments made to the offer price. Therefore, the reduction in underpricing is the result of lower adjustments made to the offer price. By applying a propensity score matching approach we can show that our results are robust with respect to self-selection issues. Our findings provide further insights concerning the effects of SOX on the capital market. Furthermore, we extend the empirical evidence concerning the partial adjustment phenomenon.

Number of Pages in PDF File: 27

Keywords: Asymmetric information, bookbuilding, IPO, offer price adjustment, partial adjustment phenomenon, propensity score matching, selection bias, SOX, underpricing

JEL Classification: G18, G24, G32

working papers series