Litigation Risk and IPO Underpricing
43 Pages Posted: 26 Oct 2011
Date Written: October 26, 2001
We examine the relation between litigation risk and IPO underpricing and test two aspects of the litigation-risk hypothesis: (1) firms with higher litigation risk underprice their IPOs by a greater amount as a form of insurance (insurance effect) and (2) higher underpricing lowers expected litigation costs (deterrence effect). To adjust for the endogeneity bias in previous studies, we use a simultaneous equation framework. Evidence provides support for both aspects of the litigation-risk hypothesis.
Keywords: Initial public offering, IPO underpricing, Securities litigation, Endogeneity
JEL Classification: G24, G32, K22, K40
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