Legal Perception and Finance: The Case of IPO Firm Value

Gerhard Schnyder,Anna Grosman,Ruth V Aguilera,Mathias Siems,Kun Fu

doi:10.2139/ssrn.3846913

Abstract

In this paper, we contribute to the literature on institutional determinants of IPO valuation. We introduce the concept of ‘legal signaling,’ which focuses on the perception of the quality of law and thus complements the existing institutional approaches to IPO valuation which consider the quality of the positive law (‘standard view’) and firm-level corporate governance practices (‘firm signaling view’). Our approach explicitly models the difference between the effect of the positive law and the effect of the perception of law on IPO value. Based on a worldwide longitudinal dataset of IPO performance across a large number of countries, we find strong support for the claim that the perception of the quality of law is more important than its actual quality to explain post-IPO firm value. This effect holds regardless of whether the law’s quality is correctly perceived or misperceived. Overall, our findings underscore the need for a more sophisticated theorization of the ways in which law affects entrepreneurial finance.

Highlights

A large literature on initial public offerings (IPOs) has focused on the way governance mechanisms influence IPO performance
The results provide strong evidence in support of H3, which hypothesized that the impact of firm-level corporate governance on the relationships between perception and IPO value differs depending on legal perception
This paper seeks to contribute to the corporate finance and Law and Finance literatures by introducing a new concept that we label ‘legal signalling’, and which explicitly distinguishes the actual law and the perception of law as two distinct concepts

Summary

Introduction

A large literature on initial public offerings (IPOs) has focused on the way governance mechanisms influence IPO performance. We are grateful to the editors of this special section, in particular Geoffrey Wood, Pawan Budhwar and Douglas Cumming, for their comments and guidance throughout the process. We would like to thank Martin Petrin, our discussant during the Entrepreneurial Finance Paper Development Workshop in Honour of Mike Wright, 20–21 June 2020, as well as Mario Daniele Amore, Giovanni Cerulli and Pasquale Scaramozzino for their helpful and constructive comments on earlier drafts. We acknowledge feedback from the participants to the 2020 International Corporate Governance Society conference. We thank two anonymous reviewers for their comments.

Methods

Results

Conclusion