An International Look at the Lawsuit Avoidance Hypothesis of IPO Underpricing

55 Pages Posted: 23 Dec 2012

See all articles by Hui Ling Lin

Hui Ling Lin

Concordia University California

Kuntara Pukthuanthong

University of Missouri, Columbia

Thomas John Walker

Concordia University, Quebec - Department of Finance

Date Written: December 23, 2012

Abstract

We examine the relationship between IPO underpricing and litigation risk in an international setting using a sample of 13,759 firms that went public across 40 countries between 1991 and 2011. While the majority of single-country studies do not find support for the lawsuit avoidance hypothesis, we find a significant positive relationship between litigation risk and underpricing in a cross-country framework. Contrary to all single-country legal liability studies outside the U.S. and consistent with the U.S. studies of Tiniç (1988) and Lowry and Shu (2002), our empirical results support the insurance effect of the lawsuit avoidance hypothesis in an international context. Our findings imply that the degree of litigation risk in a given country affects the level of underpricing for firms that go public in that country. We conclude that differences in legal risk factors can partially explain differences in underpricing across countries.

Keywords: Initial public offerings, securities regulation, securities litigation

JEL Classification: G12, G15, G18, K22

Suggested Citation

Lin, Hui Ling and Pukthuanthong, Kuntara and Walker, Thomas John, An International Look at the Lawsuit Avoidance Hypothesis of IPO Underpricing (December 23, 2012). Journal of Corporate Finance, Vol. 19, No. 13, 2013, Available at SSRN: https://ssrn.com/abstract=2193147

Hui Ling Lin

Concordia University California ( email )

Irvine, CA
United States

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: https://www.kuntara.net/

Thomas John Walker (Contact Author)

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada

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