Cultural distance and foreign IPO underpricing variations

Abstract

This paper examines the impact of cultural distance on the underpricing of initial public offerings issued by foreign firms in the United States (foreign IPOs). Using a sample of 503 foreign IPOs from 27 countries for the 1980–2012 period, we find that greater cultural differences between U.S. investors and foreign domiciled issuers increase the underpricing of foreign IPOs. Our findings are robust after controlling for a country's legal environment, financial development, and corporate tax rates. We also find that the presence of prior public equity issues in the home market moderates the positive impact of cultural distance due to the increased transparency and visibility of foreign firms among U.S. investors. Our results suggest that cultural differences influence IPO underpricing through an information asymmetry channel and visibility reduces information asymmetry between foreign issuers and U.S. investors, which, in turn, mitigates the positive impact of cultural distance on the underpricing cost.