Using a large firm-level dataset of 2920 IPOs from 21 countries we examine the impact of country-level institutional characteristics on the underpricing of IPOs. Through hierarchical linear modeling we are able to control for firm-specific and issue-specific characteristics and test whether country-specific institutional characteristics add explanatory power to explain the level of underpricing. Our results show that about 10% of the variation in the level of underpricing is between countries. The quality of a country’s legal framework, as measured by its level of investor protection, the overall quality of its legal system and its level of legal enforcement, reduces the level of underpricing significantly.

IPO, investor protection, legal framework, multi-level modeling, underpricing
Corporate Finance and Governance: General (jel G30), Financing Policy; Capital and Ownership Structure (jel G32), Government Policy and Regulation (jel G38), Corporation and Securities Law (jel K22),
ERIM Top-Core Articles
Journal of Banking & Finance
Erasmus Research Institute of Management

Engelen, P-J, & van Essen, M. (2010). Underpricing of IPOs: Firm-, issue- and country-specific characteristics. Journal of Banking & Finance, 34(8), 1958–1969. doi:10.1016/j.jbankfin.2010.01.002