Governance, Sentiment Analysis and IPO Underpricing

42 Pages Posted: 6 Dec 2018

See all articles by Maximiliano Gonzalez

Maximiliano Gonzalez

Universidad de los Andes; Universidad de los Andes, Colombia - School of Management

Alexander Guzmán

CESA School of Business

Diego Téllez

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF)

Maria-Andrea Trujillo

CESA School of Business

Date Written: November 27, 2018

Abstract

Research Question/Issue: What is the relationship between governance, tone in language and underpricing of initial public offerings (IPOs) in Latin America.

Research Findings/Insights: First, we find empirical evidence for the link between uncertainty in tone in the IPO prospectus and the level of underpricing. Second, we do not find that governance provisions at the country level explain IPO underpricing. Third, governance mechanisms at the firm level, such as board size and independence, are significant in explaining underpricing. Fourth, when interacting with uncertainty in tone, corporate governance variables at the firm level display stronger (board size) or weaker (board independence) marginal effects. Finally, we find lower levels of underpricing for family firms compared to non-family firms.

Theoretical/Academic Implications: Bigger boards seem to lead to greater underpricing while more independent boards mitigate it. This finding stresses the relevance of functional convergence in regions with weak institutions. Our results also suggest that tone in communications matter more for underpricing than governance. We argue that this could be due to the minimum corporate governance provisions at the firm level that firms need to meet before going public.

Practitioner/Policy Implications: Our results suggest that tone in firm communications is relevant for market valuation. In the context of family firms, we show that reputation effect is priced by the market valuation of the IPO.

Keywords: Governance, Sentiment Analysis, IPO Underpricing, Family Firms, Latin America

JEL Classification: G30, G32

Suggested Citation

Gonzalez, Maximiliano and Guzman, Alexander and Téllez, Diego and Trujillo, María-Andrea, Governance, Sentiment Analysis and IPO Underpricing (November 27, 2018). Available at SSRN: https://ssrn.com/abstract=3291403 or http://dx.doi.org/10.2139/ssrn.3291403

Maximiliano Gonzalez

Universidad de los Andes ( email )

Calle 21 No. 1-20
Costado Occidental
Bogotá, AK Cundinamarca 1
Colombia
573144869255 (Phone)

Universidad de los Andes, Colombia - School of Management ( email )

Carrera Primera # 18A-12
Bogotá
Colombia

Alexander Guzman

CESA School of Business ( email )

Bogota
Colombia

Diego Téllez (Contact Author)

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Medellin
Colombia

María-Andrea Trujillo

CESA School of Business ( email )

Bogota
Colombia

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