IPO Underpricing and International Corporate Governance

Journal of International Business Studies, Vol. 41, February/March, 2010

38 Pages Posted: 6 Sep 2006 Last revised: 14 May 2014

Thomas Jason Boulton

Miami University

Scott Smart

Indiana University - Kelley School of Business - Department of Finance

Chad J. Zutter

University of Pittsburgh - Finance Group

Date Written: May 19, 2007

Abstract

That a link exists between a country's legal system and the size, liquidity, and value of its capital markets is well established. We study how differences in country-level governance impact the underpricing of initial public offerings (IPOs). Examining 4,462 IPOs across 29 countries from 2000-2004, we find the surprising result that underpricing is higher in countries with corporate governance that strengthens the position of investors relative to insiders. We conjecture that when countries give outsiders more influence, IPO issuers underprice more to generate excess demand for the offer, which in turn leads to greater ownership dispersion and reduces outsiders' incentives to monitor the behavior of corporate insiders. In other words, underpricing is a cost that insiders pay to maintain control in countries with legal systems designed to empower outsiders. Consistent with this control motivation for underpricing, we find that underpricing has a negative association with post-IPO outside blockholdings and a positive association with private control benefits. In addition, firms whose insiders are entrenched either by majority ownership or dual-class structures do not underprice more in countries with better governance. In these firms, the ownership structure protects managers from outside influence, eliminating the incentive to increase outside ownership dispersion through underpricing.

Keywords: Underpricing, Initial public offerings, International finance, Corporate control, Governance

JEL Classification: G15, G24, G30, G32, G34

Suggested Citation

Boulton, Thomas Jason and Smart, Scott and Zutter, Chad J., IPO Underpricing and International Corporate Governance (May 19, 2007). Journal of International Business Studies, Vol. 41, February/March, 2010 . Available at SSRN: https://ssrn.com/abstract=928526

Thomas Jason Boulton (Contact Author)

Miami University ( email )

3028 Farmer School of Business
Oxford, OH 45056
United States
(513) 529-1563 (Phone)
(513) 529-8598 (Fax)

Scott B. Smart

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Kelley School of Business
Bloomington, IN 47405
United States
812-855-3401 (Phone)
812-855-5875 (Fax)

Chad J. Zutter

University of Pittsburgh - Finance Group ( email )

352 Mervis Hall, Katz GSOB
University of Pittsburgh
Pittsburgh, PA 15260
United States
412-648-2159 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~czutter/

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