Political Power Local Policy Uncertainty and IPO Pricing
61 Pages Posted: 25 Nov 2018 Last revised: 10 Feb 2021
Date Written: February 9, 2021
Greater partisan alignment among lawmakers enhances their ability to respond rapidly to adverse shocks, but it also undermines the quality of checks and balances and encourages excessive governmental intervention in local areas aligned with the ruling party. We investigate how this form of local policy risk affects IPO underpricing. One standard-deviation increase in political alignment between local politicians and the federal government translates into an extra $1.58 million being left on the table, which corresponds to 5.39% of the average valuation discount. This effect is concentrated in firms that are vulnerable to legislative interventions and has important long-term implications.
Keywords: Initial Public Offering, Underpricing, Political Uncertainty, Political Proximity, Policy Risk
JEL Classification: G10, G14, G32, G39
Suggested Citation: Suggested Citation