تاثیر کیفیت نهادی در عرضه اولیه عمومی

Country-level institutional quality is positively correlated with the underpricing of initial public offerings (IPOs). The association is strong for IPOs issued in developed markets, but absent for emerging-market IPOs. We hypothesize that extra-legal institutions, including financial reporting practices, law enforcement, public trust, and outside monitoring affect the availability and value of private benefits of control accessible to entrepreneurs, which in turn shapes the relation between institutional quality and IPO underpricing. Evidence on the relation between underpricing and post-IPO ownership dispersion is consistent with prior studies that suggest that underpricing is motivated, at least in part, by entrepreneurs’ desire for post-IPO control.

Prior research suggests that country-level institutional quality plays a crucial role in capital market outcomes. For example, La Porta, Lopez-de-Silanes, Shleifer, & Vishny (1997a) find that the effects of country-level institutional quality extend to firms’ ability to raise equity capital, as fewer companies undertake initial public offerings (IPOs) in countries with weaker investor protections. However, the impact of institutional quality on IPO outcomes remains a subject of debate. We study the relation between institutional quality and IPO underpricing, which exhibits substantial variation across countries, and consider the role of extra-legal institutions that impact the balance of power between insiders and shareholders. Raising capital through an IPO is a corporate milestone that may help position a firm for future growth and strengthen its competitive position. However, conducting an IPO is an expensive and time consuming process, one that firms presumably undertake only when the benefits of public ownership exceed the costs. Ritter (1987) documents that underpricing is the highest cost in the IPO process, so understanding the factors that influence underpricing across firms and across countries helps shed light on firms’ decisions to go public. Among these factors are the development and quality of legal and extra-legal institutions across countries. There are several reasons to suspect that institutional quality is associated with underpricing. Boulton, Smart, & Zutter (2010a) posit that strong institutional quality is a double-edged sword for entrepreneurs seeking to raise external financing through equity offerings. Whereas strong institutions make it easier to raise capital, they also strengthen the position of outside investors, putting entrepreneurs’ control over their enterprises at risk. However, outsiders may have little incentive to exercise the rights granted to them by the legal system if their ownership stakes are relatively low. At the IPO, insiders can generate excess demand from outsiders by setting a low offer price, and that excess demand may lead to a more dispersed ownership structure with less active monitoring by outside investors. Consistent with this conjecture, Boulton, Smart, and Zutter find that underpricing is higher, and ownership dispersion greater, when firms go public in a country with stronger investor protections. However, others postulate that institutional quality and underpricing are unrelated or inversely related. If, as Engelen and van Essen (2010) suggest, strong institutions decrease ex ante uncertainty by reducing investors’ fear of expropriation, strong institutional quality might be associated with lower underpricing. Additionally, if cheaper and/or more effective mechanisms for retaining control are readily available, the motivation to underprice to influence control is diminished. This might be the case if, for example, dual class capital structures or inside ownership confer the control that managers desire. Peng and Jiang (2010) argue that in countries with more developed institutions, the benefits of concentrated family ownership may outweigh the costs, and firms with concentrated family ownership have little need to underprice shares at the IPO to maintain control. Because these views are not mutually exclusive, the overriding impact of institutional quality on underpricing is ultimately an empirical issue. Examining over 10,700 IPOs issued in 37 countries from 1998-2008, we begin by confirming the positive relation between institutional quality and IPO underpricing reported by Boulton et al. (2010a). We find that time-varying, country-level measures of political stability and the absence of violence, government effectiveness, regulatory burden, and control of corruption are positively related to firm-level IPO underpricing. These results are robust to the inclusion of deal characteristics that prior research finds are related to IPO underpricing, as well as issue year and industry controls and country-level fixed effects. A deeper examination of our IPO sample uncovers stark differences in the relation between country-level institutional quality and underpricing for developed and emerging markets. We find that the positive relation between country-level institutional quality and underpricing is strong for IPOs issued in developed markets, but absent for IPOs issued in emerging markets. We hypothesize that this result is, at least in part, due to differences in extra-legal institutions, including financial reporting practices, law enforcement, public trust, and outside monitoring. In general, a legal infrastructure designed to protect outside investors may not have the desired consequences if other factors work against the legal system. In countries lacking effective extra-legal institutions, entrepreneurs may face little or no risk of losing control of their enterprises after going public, even though legal institutions in those countries ostensibly give minority investors significant protection. In such a case, firms going public have no incentive to use higher underpricing as a means to bring about a more dispersed (and hence, less powerful) outside ownership structure. Therefore, it should be the case that the positive relation between underpricing and institutional quality documented in Boulton et al. (2010a) is most evident in countries with extra-legal institutions that strengthen the position of outside investors. This paper leverages cross-sectional variation in economic development, financial reporting practices, law enforcement, public trust, and outside monitoring to see if the relation between institutional quality and IPO underpricing is related to extra-legal institutions. Using La Porta, Lopez-de-Silanes, Shleifer, and Vishny's (1998) accounting standards index to proxy for financial reporting practices in our sample countries, we find that the positive relation between country-level institutional quality and underpricing is evident for IPOs in countries with above the median accounting standards index scores, but absent in countries with accounting index scores that are equal to or below the median. We hypothesize that poor financial reporting practices make it easier for entrepreneurs to expropriate shareholders, resulting in a weaker relation between country-level institutional quality and IPO underpricing in countries with weaker accounting standards. At the same time, strong financial reporting standards make mechanisms that enhance post-IPO control, including underpricing, more attractive to entrepreneurs. Bhattacharya and Daouk (2009) demonstrate that, when it comes to securities laws, no law is sometimes better than a law that is not enforced. We use the enforcement of insider trading laws (Bhattacharya & Daouk, 2002) to proxy for law enforcement and find that the positive relation between country-level institutional quality and underpricing is only evident for IPOs in countries that enforce insider trading laws. This is consistent with Boulton, Smart, and Zutter's (2010a) conjecture that the positive relation between country-level institutional quality and underpricing is motivated by control considerations. Specifically, in countries that enforce laws designed to protect outside investors from expropriation, entrepreneurs must seek legal means to strengthen their post-IPO control (for example, IPO underpricing). However, in countries that fail to enforce their laws, entrepreneurs can break the law to expropriate shareholders with little fear of punishment. Thus, the incentive to underprice is reduced when law enforcement is lax. Studies find that trust is associated with economic choices at both the individual level (see, for example, Guiso, Sapienza, & Zingales, 2008) and the aggregate level (see, for example, Guiso, Sapienza, & Zingales, 2004 and La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997b). Guiso et al. (2008) report that public trust is positively correlated with both stock market participation and ownership concentration. We examine the impact of public trust on the relation between country-level institutional quality and IPO underpricing and find that the positive relation is strong in countries classified as high trust, but not evident in low trust countries. We also consider the monitoring role of commercial banks, who may substitute for shareholder monitoring, especially when they can make equity investments. Barth, Caprio, & Levine (2006) report significant variation in country-level regulations governing bank equity investments in nonfinancial firms. We expect the monitoring effect of bank ownership to be strongest when banks are relatively unconstrained from owning equity. When bank ownership is relatively unconstrained, bank monitoring should reduce the value of the private benefits of control, thereby reducing entrepreneurs’ incentives to take actions to maintain post-IPO control. Banks’ incentives to monitor are lower when they cannot make equity investments. In such cases, the importance of other outside monitors increases and entrepreneurs may go to greater lengths to limit outsiders’ incentives to monitor. In general, our evidence is consistent with the hypothesis that cross-country differences in regulations governing bank ownership affect the link between underpricing and institutional quality. We find that in countries where bank ownership of nonfinancial firms is generally unrestricted, the relation between institutional quality and underpricing is mixed with two institutional quality measures negatively and two positively related to IPO underpricing. In countries where bank ownership is limited, three out of the six measures exhibit a positive and significant relation with IPO underpricing. We posit that the positive association between institutional quality and underpricing is driven by control considerations. The seminal paper that links IPO underpricing to post-IPO ownership structure is Brennan and Franks (1997), which proposes a “reduced monitoring hypothesis” whereby underpricing should be positively correlated with the degree to which insiders value control. According to Brennan and Franks, higher underpricing leads to oversubscription of the IPO, and oversubscription enables the issuer to discriminate against bidders seeking a large share block. Consistent with their hypothesis, they find evidence that: (i) UK firms issue shares disproportionately to small bidders in oversubscribed offers; (ii) greater underpricing is associated with smaller outside blockholdings up to 7 years after the IPO; and (iii) firms that underprice more receive fewer hostile takeover bids up to 10 years beyond the IPO. Several studies provide additional evidence consistent with Brennan and Frank's (1997) reduced monitoring hypothesis. Smart and Zutter (2003) find lower underpricing for US dual-class offerings relative to single-class offerings. The authors interpret this finding as consistent with the reduced monitoring hypothesis because the dual-class structure entrenches management and reduces the need to underprice to strengthen managerial control. The authors also show that post-IPO ownership dispersion is positively related to underpricing among single-class firms. Boulton, Smart, & Zutter (2010b) report that underpricing tends to be higher during active corporate control markets. Consistent with a control motivation for underpricing, the authors also find a positive correlation between underpricing and ownership dispersion, and between ownership dispersion and the probability that an IPO firm remains independent. Additional evidence is found in Brau and Fawcett (2006), who survey the chief financial officers of 336 firms that attempted an IPO during 2000-2002 and find that 40% agreed that “ensuring a wide base of owners” was an important factor in determining IPO underpricing.1 In an effort to distinguish between alternative explanations for the relation between institutional quality and underpricing, our final set of tests examines the relation between underpricing and the ownership structure of our IPO sample at several intervals following their IPO. Using two measures of ownership dispersion measured 6 months, 1 year, and 2 years following the offering, we find that IPO underpricing is positively correlated with post-IPO ownership dispersion. This finding is consistent with the idea that entrepreneurs use underpricing as a means to influence the post-IPO ownership structure of their firm. Undoubtedly, this is only a partial explanation, as other factors also have the potential to impact IPO underpricing, but our evidence corroborates prior studies that find a link between underpricing and post-IPO ownership dispersion. This study extends our understanding of the impact of country-level institutional quality on IPO outcomes in at least four important ways. First, our study contributes to the emerging literature that examines the role informal governance mechanisms have on financial market outcomes.2 Our results indicate that the relation between country-level institutional quality and IPO underpricing is dependent on extra-legal factors that impact the availability and value of private benefits of control. Not surprisingly, our results suggest a complex interplay between the various institutions that affect entrepreneurs’ and investors’ relative positions of strength. The interactions between legal and extra-legal institutions have the potential to influence corporate financial behavior in many ways including the extent to which firms utilize leverage and the mechanisms available to outside investors when firms underperform. Second, whereas the governance measures used in much of the related literature are fixed in time and often based on the laws and institutions in place many years before the event being studied, the measures of institutional quality at the center of this study are updated every other year through 2002 and every year thereafter.3 Given the dramatic impact that capital market reforms have had on international stock markets in recent years (see, for example, de la Torre, Gozzi, & Schmukler, 2007), the use of contemporaneous measures provides a more accurate portrayal of the relation between institutional quality and IPO underpricing. Third, the institutional quality measures at the center of this study are the perception-based measures developed by Kaufman et al. (1999) and recently updated by Kaufmann, Kraay, & Mastruzzi (2009). The measures focus on the traditions and institutions that drive the exercise of authority, including the selection of government officials, policy formulation and implementation, and the institutions that govern economic and social interactions within countries. The six dimensions include voice and accountability, political stability and the absence of violence, government effectiveness, regulatory burden, rule of law, and control of corruption. These measures contrast with those used in prior studies that tend to focus on laws on the books that impact the position of investors relative to insiders (for example, La Porta, Lopez-de-Silanes, Shleifer, and Vishny's (1998) anti-director rights index and creditor rights index) and highlight the importance of perceptions of country-level governance and institutional quality on firm-level capital market outcomes.4 Our results support existing research, including Kaufmann, Mehrez, & Schmukler (1999b), that reports a link between subjective perceptions and future economic outcomes. Fourth, we examine a longer time series and a larger number of countries than previous studies. We study over 10,700 IPOs issued in 37 countries from 1998-2008. Our sample includes IPOs issued during the hot IPO market of the late 1990s and the worldwide financial crisis of 2008, both of which were dramatic periods for firms raising capital. Our sample also includes a large number of IPOs issued in emerging markets. This gives us the opportunity to study whether the effects of country-level institutional quality are similar for IPOs issued in developed and emerging markets.5 This study proceeds as follows. In Section 2 we develop and formally state our hypotheses. Section 3 describes the data and method. Section 4 reports results consistent with a positive relation between country-level institutional quality and IPO underpricing, explores additional factors that shed light on this relation, and considers the association between underpricing and post-IPO ownership structure. Section 5 concludes.

We find that country-level measures of voice and accountability, political stability and the absence of violence, government effectiveness, regulatory burden, rule of law, and control of corruption help to explain firm-level IPO underpricing. The results are robust to the inclusion of deal characteristics that prior research finds to be related to IPO underpricing, controls for issue year and industry, and country-level fixed effects. Deeper examination of our IPO sample uncovers stark differences in the relation between country-level institutional quality and underpricing for subsamples based on extra-legal characteristics. We find that the relation is strong for IPOs issued in developed markets, but nearly absent for IPOs issued in emerging markets; strong for countries with an above the median accounting standards index score, but not evident for countries with accounting index scores that are below the median; and strong in countries that enforce insider trading laws but absent in countries that do not enforce insider trading laws. We examine the impact of public trust on the relation between country-level institutional quality and underpricing and find it to be much stronger for countries classified as high trust than for countries with lower levels of trust. Finally, when we examine the effect of bank ownership of nonfinancial firms we find that the relation between institutional quality and IPO underpricing is stronger in countries that restrict or prohibit bank ownership. Additional tests designed to distinguish between alternative explanations for the positive association between institutional quality and underpricing tend to support the conjecture that the relation is driven by control considerations. When we consider the possibility that alternative mechanisms confer the control entrepreneurs desire, we find that insiders tend to retain more shares in the typical developed-market IPO than for the average emerging-market IPO. In addition, dual-class capital structures and large employee/family blockholdings are twice as common in developed markets. Further, we find that greater underpricing is associated with a less concentrated ownership structure at least 2 years after the IPO. Together, we interpret this evidence as consistent with the control motivation for underpricing posited in the prior literature. At the IPO, insiders can generate excess demand from outsiders by setting a low offer price, and that excess demand may lead to a more dispersed ownership structure with less active monitoring by outside investors.