Local Policy Risk and IPO Performance
77 Pages Posted: 25 Nov 2018 Last revised: 23 Dec 2019
Date Written: October 30, 2018
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: Suggested Citation