Risk, the quality of intermediaries and legal liability in The Netherlands IPO market

Abstract

Examining a sample of 92 initial public offerings (IPOs) on the Amsterdam Stock Exchange (ASE) from 1983 to 1997 this paper addresses the relation between a number of risk variables and the quality of both the auditor and underwriter hired by an IPO firm. To the best of my knowledge, the study examines a variable not reported previously in IPO research, namely the number of audited reports enclosed in the IPO prospectus as a signal of IPO quality. The empirical results show no significant relationship between an IPO firm’s auditor quality and the risk variables examined, which is consistent with auditors having mainly a role by certifying a firm’s financial statements. However, auditor quality appears negatively related to the number of audited reports published in the IPO prospectus. The latter finding is supportive for auditor quality and the number of audited reports being substitutes. Underwriter prestige appears to be a decreasing function of the issuing firm’s risk measured by firm-specific risk variables as well as the risk of the offering itself measured by the percentage of new shares offered. This outcome is consistent with underwriters who, in The Netherlands’ IPO market, bear the risk of legal liability rather than auditors.