Air pollution, bid price bias, and IPO underpricing

Abstract

We examine the impact of air pollution on underpricing of initial public offerings (IPOs) and its underlying mechanisms. Our findings suggest that IPO underpricing increases when air pollution is more severe in cities where bidding investors are located. Mechanism tests show that air pollution influences investors' mood and cognition, leading them to make pessimistic bids and rely more on anchors. Additional tests document that the impact of air pollution on IPO underpricing is more salient when information asymmetry is more severe and when the IPO firm also faces severe air pollution. Our research contributes to the literature on the causal influence of air pollution on pricing efficiency in primary markets by linking air pollution to potential bias embedded in investors’ bid prices, which carries important implications for environmental regulations in emerging markets, given the economic cost of air pollution imposed on IPO firms.