Local Policy Risk and IPO Performance

77 Pages Posted: 25 Nov 2018 Last revised: 23 Dec 2019

See all articles by Gonul Colak

Gonul Colak

Hanken School of Economics

Dimitrios Gounopoulos

University of Bath

Panagiotis Loukopoulos

University of Strathclyde

Georgios Loukopoulos

The Open University

Date Written: October 30, 2018

Abstract

Greater partisan alignment among federal lawmakers enhances their ability to rapidly respond to adverse shocks. However, it undermines the quality of checks and balances and encourages excess and/or biased governmental interference towards local areas with closer political proximity to the ruling party. We investigate how this form of local policy risk affects the pricing of IPOs. On average, an exogenous shift on the political map from an area completely opposed to the ruling party to one completely aligned translates into $4.1 million being left on the table (i.e., 2.6% underpricing). This effect is only prevalent among firms which are vulnerable to legislative interventions and has severe long-term implications.

Keywords: Initial Public Offering, Underpricing, Political Uncertainty, Political Proximity, Policy Risk

JEL Classification: G10, G14, G32, G39

Suggested Citation

Colak, Gonul and Gounopoulos, Dimitrios and Loukopoulos, Panagiotis and Loukopoulos, Georgios, Local Policy Risk and IPO Performance (October 30, 2018). Available at SSRN: https://ssrn.com/abstract=3275789 or http://dx.doi.org/10.2139/ssrn.3275789

Gonul Colak

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

Dimitrios Gounopoulos (Contact Author)

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

Panagiotis Loukopoulos

University of Strathclyde ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom

Georgios Loukopoulos

The Open University ( email )

Walton Hall
Milton Keynes, MK6 7AA
United Kingdom

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