The impact of internationalization on IPO underpricing: A result of agency costs reduction, a certification effect, or a diversification benefit?

Abstract

We examine the impact of internationalization on IPO underpricing in China. Our findings, which suggest that internationalization can reduce IPO underpricing, echo similar findings in the literature. However, we document that the transmission channel is not consistent with a diversification benefit documented in the literature. Instead, we find that internationalization: 1) serves as a good signal for investors and certifies the IPO is a quality investment due to lower information asymmetry; and 2) enhances corporate governance so that agency problems are less severe, thus leading to lower IPO underpricing. Overall, the underlying mechanisms differ between mature and emerging markets.