Economic freedom and IPO underpricing

Abstract

This paper examines how the difference in institutional environments constitutes differential IPO underpricing across countries. Using the Heritage Foundation's Index of Economic Freedom (IEF) as a proxy for the heterogeneous institutional environment, and a sample of 3728 IPOs from 22 countries and regions over the period 1993-2014, we find that countries with higher economic freedom have significantly less serious IPO underpricing problems. Moreover, we find that among the 10 economic freedom factors covered by theIEF, financial freedom related factors play a more important role in reducing the IPO underpricing problem. Finally, consistent with the market sentiment hypothesis, we find strong evidence that pre-IPO market sentiment influences IPO firstday returns, and that the IPO underpricing problem is less severe when the market is bearish.

The determinants of IPO initial returns in emerging markets: a quantile regression

“…Thus, PRT is expected to negatively affect initial returns. Results of Chen et al (2017) validate this argument. However, Boulton et al (2010) find that underpricing is higher in countries with CG that strengthens the position of outsiders relative to insiders.…”

“…It also measures the strength and effectiveness of the country's policies and institutional framework to avoid and fight corruption (WB, 2020). Engelen and van Essen (2010) and Chen et al (2017) argue that freedom from corruption reflects more government protection that benefits in mitigating information asymmetry and, ultimately, underpricing. La Porta et al (2002) verify that investors are keen to pay more for financial assets if the legal system is better secured.…”

“…Moreover, market-specific determinants incorporate market return (a proxy for investor sentiment) and the stock market traded value (a proxy for stock market liquidity). Country (institution)-specific determinants include, inter alia, legal framework quality and contract enforcement (see, for example, Ljungqvist, 2007;Engelen and van Essen, 2010;Chen et al, 2017;Azevedo et al, 2018;Marcato et al, 2018). Scholars (e.g.…”

Are secondary equity offerings of Black Economic Empowerment (BEE) REITs less underpriced than non-BEE REITs?

“…Since Real Estate Investment Trusts (REITs) are increasingly employing SEOs to raise funds, it is critical to assess their pricing. According to Chen et al. (2017), nations with more economic freedom have fewer major SEO underpricing issues.…”

“…Since Real Estate Investment Trusts (REITs) are increasingly employing SEOs to raise funds, it is critical to assess their pricing. According to Chen et al (2017), nations with more economic freedom have fewer major SEO underpricing issues. As recently noted by Ho et al (2020), South Africa has a high index of economic freedom, therefore it will be fascinating to empirically assess the degree of underpricing in such a market.…”