Urban Economic Openness and IPO Underpricing

Abstract

This paper represents a first attempt to employ a macroeconomic approach to explain the high and varying IPO underpricing within a single emerging market. We examine the empirical impact of trade openness on the short-run underpricing of initial public offerings (IPOs) using city-level data. Particularly, we argue that urban economic openness (UEO) has a significant impact on the productivity and on prices of both direct and indirect real estate due to productivity gains of companies in more open areas. This in turn positively affects the firm's profitability, enhancing the confidence in local real estate markets and future company performance, hence decreasing the uncertainty of the IPO valuation. As a result, issuers have less incentive to underprice IPO shares. We use a sample of Chinese real estate companies IPOs, which offer a suitable laboratory thanks to their strong geographic investment patterns focused locally and a country, with a higher heterogeneous openness across regions. Controlling for traditional firm-specific characteristics used for developed markets and Chinese-related features (i.e. listing location and state ownership), we find the evidence that companies investing in economically more open areas experiences loss IPO underpricing. Our results show high explanatory power and are robust to different specifications.

Keywords: Ipo Underpricing; Urban Economic Openness; Real Estate; China