U.S.-Bound IPOs: Issue Costs and Market Selectivity

Abstract

We examine initial public offerings (IPOs) by foreign firms in the U.S. market between 1990 and 1997, and compare their direct and indirect issue costs to IPOs by U.S. firms. Our results indicate that foreign IPOs involve approximately the same costs on average as domestic IPOs, for all except those experiencing strong demand and upward revisions in the offer price over the course of the road show. For upwardly revised IPOs, foreign IPOs have significantly lower underpricing compared to domestic IPOs. For these offers, we find that lower underpricing is associated with less risk due to the generally greater quality of foreign issuers. It is also the case that these offers are sold more frequently in multiple markets. In addition, we observe lower underpricing for IPOs from emerging markets, which is consistent with demand being driven to some extent by diversification. Overall, we uncover no evidence to suggest that foreign IPOs experience greater capital raising costs than domestic IPOs.