How does national culture influence IPO underpricing?

Abstract

In this paper we examine how national culture affects the international underpricing of initial public offerings (IPOs). We hypothesize that cultural norms and beliefs informally influence human perceptions, such as risk tolerance, motivations, and perceived options, and thus affect behavior. Using a large dataset of 19,420 IPOs listed in 44 countries, we find strong evidence that issuing firms located in countries with a higher degree of uncertainty avoidance tend to experience a lower level of underpricing. In contrast, issuing firms in countries characterized by higher collectivism, masculinity, and power distance scores tend to experience a greater level of underpricing. Our results are robust to controlling for a country's legal system, investor protection, private control benefits, regulations in bank ownership, tax advantages, and stock market performance and with respect to alternative culture proxies and subsamples. Our findings highlight the importance of national culture in explaining international IPO underpricing.