The Impact of Institutional Quality on Initial Public Offerings

Abstract:     
Country-level institutional quality is positively correlated with the underpricing of initial public offerings (IPOs). The association is strong for IPOs issued in developed markets, but nearly absent for emerging market IPOs. We hypothesize that extra-legal institutions, including financial reporting practices, law enforcement, public trust, and outside monitoring affect the availability and value of private benefits of control accessible to entrepreneurs, which in turn shapes the relation between institutional quality and IPO underpricing. Our evidence supports prior studies that suggest that underpricing is motivated, at least in part, by entrepreneurs’ desire for post-IPO control.

Number of Pages in PDF File: 46

Keywords: International finance, Initial public offerings, Governance, Investor protection

JEL Classification: G15, G24, G30, G32, G34

working papers series