Diversification of Pre-IPO Ownership and Foreign IPO Performance

Abstract

Foreign IPO firms incur higher issuance costs than domestic firms due to greater information asymmetry and ex ante valuation uncertainty. Little is known about how to overcome such liability of foreignness. This study, based on foreign-listed Chinese firms, shows that pre-IPO financing relationship with investors from the country of listing can effectively mitigate cross-border information friction at the time of IPO, and is associated with lower underpricing, smaller underwriting spread and other offering expenses, superior post-IPO stock returns, greater analyst coverage, lower forecast error and dispersion. The benefits of pre-IPO relationship increase in firm-level information asymmetry and the strength of relationship.

Keywords: foreign IPO, liability of foreignness, information asymmetry, pre-IPO financing relationship, issuance costs, underpricing, financial analysts

JEL Classification: G15, G24, F30