Narcissistic managers and IPO underpricing

Abstract

Using hand-collected data on the signature size of managers in Chinese initial public offerings (IPOs) from 2007 to 2019 as a proxy for managerial narcissism, we examine how IPOs with narcissistic managers (narcissistic IPOs) affect IPO underpricing. The findings suggest that narcissistic IPOs have higher underpricing than non-narcissistic IPOs. Specifically, we find that on average, a narcissistic IPO exhibits approximately 11.3% higher underpricing than a median IPO firm. Our results are robust to alternative metrics of narcissism and underpricing after controlling for endogeneity. Additional analyses suggest that narcissistic IPOs are more likely to engage in earnings management than non-narcissistic IPOs. The former exhibits excessive risk-taking behavior, gauged by earnings volatility pre-IPO and a higher beta post-IPO. In the cross-sectional analyses, we document that the impact of managerial narcissism on IPO underpricing is more salient for IPOs facing unsophisticated investors, high market sentiment, or poor corporate governance.