Impact of investors’ protection, transparency level and legal origin on initial public offering (IPO) initial returns

Sheela Sundarasen, Sanjay Goel, Fairuz Ahmad Zulaini

Research output: Contribution to journalArticlepeer-review

Abstract

Purpose: Managers may underprice initial public offerings (IPOs), leading to higher initial returns (IRs). The purpose of this paper is multi-fold: to compensate investors for risk, to reduce litigation risk, as well as to maintain control over the firm. The authors examine country-level contingencies (degree of investor protection, legal origin and degree of transparency) in OECD countries to explain IPO IRs. Design/methodology/approach: Cross-sectional data comprising of 4,164 IPOs from 28 OECD countries are used for the period of 2005-2010. Ordinary least square using multiple linear regressions is used to test the hypotheses. Findings: Investors’ protection is associated with higher IRs. This relationship is stronger in the non-common law countries. Degree of transparency negatively moderates the relationship in common law countries. Overall, the results show evidence of risk compensation, litigation risk reduction, and managerial control motives in underpricing. Originality/value: IPO IRs in OECD countries is examined, within the boundaries of institutional characteristics, i.e., investors’ protection, legal origin and transparency level.

Original languageEnglish (US)
Pages (from-to)738-760
Number of pages23
JournalManagerial Finance
Volume43
Issue number7
DOIs
StatePublished - Jan 1 2017

Keywords

  • Initial public offering (IPO)
  • Initial returns
  • Investors’ protection
  • Legal origin
  • Transparency level

Fingerprint Dive into the research topics of 'Impact of investors’ protection, transparency level and legal origin on initial public offering (IPO) initial returns'. Together they form a unique fingerprint.

Cite this