Abstract
This paper examines the impact of expected skewness on IPO underpricing based on a comprehensive set of IPOs from 23 countries. We find that IPOs with high expected skewness at both industry-level and market-level exhibit significantly higher first-day returns, which is more pronounced in countries with relatively higher litigation risk, higher gambling propensity, a larger non-religious population, and a more individualistic culture. Moreover, IPOs with high expected skewness significantly underperform those with low expected skewness over a longer horizon. Our results suggest that a key friction that prevents issuers from taking advantage of such skew preference may be the legal risk involved with potential overpricing.
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