Political Uncertainty and the Market for IPOs
41 Journal of Corporation Law 431 (2015)
40 Pages Posted: 10 Jul 2015 Last revised: 25 Jan 2016
Date Written: July 10, 2015
This Article presents a simple theory and model of the effects of political uncertainty on the market for IPOs. Our model generates four central predictions: (i) increased political uncertainty reduces the frequency of IPOs; (ii) firms that choose to conduct an IPO during periods of political uncertainty are, on average, of higher quality and generate greater return on investment in the secondary market; (iii) political uncertainty increases the cost of capital for IPO firms; but (iv) underpricing is less pronounced during periods of heightened political uncertainty. We demonstrate that each of these predictions is consistent with available empirical evidence.
Our model fills gaps in two related literatures. First, the literature on political uncertainty has, at present, largely ignored its impact on corporate finance decisions such as IPO activity. Second, the literature on IPO decision-making omits political uncertainty as a key determinant of firms’ financing decisions. We demonstrate that political uncertainty acts independently of the extant theories of the going-public decision. Finally, our model illustrates that there are both costs and benefits to political uncertainty. Its net impact on the market for IPOs is thus an empirical question, not an a priori conclusion.
Keywords: Political Uncertainty, IPO, Underpricing
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