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Economic freedom and IPO underpricing |
Yibiao Chen1, Steven S. Wang2, Wilson H. S. Tong3, Hui Zhu4() |
1. Agriculture Bank of China International Securities Co Ltd. Central, Hong Kong, China 2. School of Business, Renmin University of China, Haikou, China. 3. Faculty of Business, The Hong Kong Polytechnic University, Hong Kong, China 4. Zhejiang University of Finance and Economics, NO. 18 Xueyuan Street, Xiasha Higher Education District, Hangzhou, Zhejiang Province, China |
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Abstract This paper examines how the difference in institutional environments constitutes differential IPO underpricing across countries. Using the Heritage Foundation’s Index of Economic Freedom (IEF) as a proxy for the heterogeneous institutional environment, and a sample of 3728 IPOs from 22 countries and regions over the period 1993–2014, we find that countries with higher economic freedom have significantly less serious IPO underpricing problems. Moreover, we find that among the 10 economic freedom factors covered by theIEF, financial freedom related factors play a more important role in reducing the IPO underpricing problem. Finally, consistent with the market sentiment hypothesis, we find strong evidence that pre-IPO market sentiment influences IPO firstday returns, and that the IPO underpricing problem is less severe when the market is bearish.
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Keywords
IPO underpricing
Institutional environment
Economic freedom
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Issue Date: 06 February 2018
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