Political Power Local Policy Uncertainty and IPO Pricing

61 Pages Posted: 25 Nov 2018 Last revised: 10 Feb 2021

See all articles by Gonul Colak

Gonul Colak

University of Sussex ; Hanken School of Economics

Dimitrios Gounopoulos

University of Bath

Panagiotis Loukopoulos

University of Strathclyde

Georgios Loukopoulos

Strathclyde Business School

Date Written: February 9, 2021

Abstract

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

Colak, Gonul and Gounopoulos, Dimitrios and Loukopoulos, Panagiotis and Loukopoulos, Georgios, Political Power Local Policy Uncertainty and IPO Pricing (February 9, 2021). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3275789 or http://dx.doi.org/10.2139/ssrn.3275789

Gonul Colak

University of Sussex ( email )

Jubilee Building
Falmer
Brighton, BN1 9SN
United Kingdom

Hanken School of Economics ( email )

P.O. Box 479
Arkadiankatu 22
FI-00100 Helsinki, 00100
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

Strathclyde Business School ( email )

199 Cathedral Street,
Stenhouse Wing 3.17
Glasgow, G4 0QU

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