Language similarity and IPO underpricing

Abstract

In this study, we investigate whether language similarity between auditors and chairpersons mitigates IPO underpricing. We focus on China, a country with a high incidence of IPO underpricing. We define language similarity as the auditor and the chairperson sharing the same dialect. To measure this, we manually collect the identification (ID) numbers of auditors and chairpersons and construct a proxy for language similarity based on the birthplaces identified by their ID numbers. Our findings indicate that auditor-chairperson language similarity helps alleviate IPO underpricing. We also find that IPO companies are more likely to select auditors who share the same language with their chairpersons. Our results remain robust even after controlling for additional control variables and employing matching methods, 2SLS instrumental variables, and alternative measurements. The mechanism through which language similarity reduces IPO underpricing is by compensating for informational gaps in low-readability and high-similarity prospectuses through incremental information production. Furthermore, the effects of language similarity are more pronounced when IPO companies are audited by Big 10 audit firms, followed by greater analyst coverage, and are listed under the registration-based IPO regime. Our research confirms the significant role of language similarity in emerging capital markets.