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Abstract

We study the impact of country-level accounting conservatism on international IPO underpricing. Examining 13,285 IPOs from 36 countries, we find that IPOs are underpriced less in countries in which existing public firms practice more accounting conservatism. The link between conservatism and underpricing is robust to alternative measures of conservatism, country mean regressions, sample country exclusions, and endogenous treatment models. Consistent with the hypothesis that conservatism reduces underpricing by mitigating the impact of information asymmetries, we find that higher country-level conservatism is associated with lower country-level PIN values and that the negative relation between conservatism and underpricing is strongest for IPOs involving small firms in which information asymmetries are likely to be high. Lastly, we find evidence that legal origin, a factor linked to the practice of conservatism, influences the relations between underpricing and conservatism.

Résumé

Nous étudions l’impact du conservatisme comptable d’un pays sur la sous-évaluation des offres publiques initiales (OPI) internationales. Examinant 13 285 OPI dans 36 pays, nous constatons que les offres publiques initiales sont moins sous-évaluées dans les pays où les entreprises publiques existantes pratiquent plus de conservatisme comptable. Le lien entre le conservatisme et la sous-évaluation est solide par rapport aux mesures alternatives au conservatisme, aux régressions moyennes par pays, aux exclusions d’un échantillon de pays et aux modèles de traitement endogène. Conformément à l’hypothèse que le conservatisme réduit la sous-évaluation en atténuant l’impact des asymétries d’information, nous constatons qu’un niveau plus élevé de conservatisme au niveau d’un pays est associé à des valeurs plus faibles de probabilités de négoce basées sur l’information (PBI) d’un pays et que la relation négative entre le conservatisme et la sous-évaluation est plus forte pour les OPI qui concernent des petites entreprises pour lesquelles les asymétries d’information risquent d’être élevées. Enfin, nous constatons que l’origine légale, un facteur lié à la pratique du conservatisme, influence les relations entre la sous-évaluation et le conservatisme.

Resumen

Estudiamos el impacto del conservadurismo contable a nivel país sobre la subvaloración de las ofertas públicas iniciales (IPO) internacionales. Examinamos 13.285 IPOs de 36 países, encontramos que las IPOs se subvaloran menos en países en los cuales existen empresas públicas que practican más conservadurismo contable. El vínculo entre conservadurismo y subvaloración es robusto a las medidas alternativas de conservadurismo, las regresiones de las medias de los países, las exclusiones del país de la muestra, y los modelos de tratamiento endógeno. Consistente con la hipótesis que el conservadurismo reduce la subvaloración mediante la mitigación del impacto de las asimetrías de información, encontramos que un nivel más alto de conservadurismo es asociado con un nivel más bajo en los valores PIN a nivel país y que la relación negativa entre el conservadurismo y las subvaloración es más fuerte en las IPOs que involucran empresas pequeñas en donde las asimetrías de información es probable sean altas. Finalmente, encontramos evidencias que el origen legal, un factor vinculado a la práctica de conservatismo, influencia las relaciones entre subvaloración y conservadurismo.

Resumo

Nós estudamos o impacto do conservadorismo contábil ao nível do país na subprecificação de ofertas públicas iniciais (IPO) internacionais. Examinando 13.285 IPOs de 36 países, descobrimos que os IPOs são menos subprecificados nos países em que as empresas listadas existentes praticam um maior conservadorismo contábil. O vínculo entre conservadorismo e subprecificação é robusto para métricas alternativas de conservadorismo, regressões à média de países, exclusões de países de amostra e modelos de tratamento endógeno. Em consonância com a hipótese de que o conservadorismo reduz a subprecificação ao mitigar o impacto de assimetrias de informação, verifica-se que o maior conservadorismo a nível nacional está associado a valores PIN mais baixos e que a relação negativa entre conservadorismo e subprecificação é mais forte para IPOs envolvendo pequenas empresas, em que as elevadas assimetrias de informação são mais prováveis. Por fim, encontramos evidências de que a origem jurídica, um fator vinculado à prática do conservadorismo, influencia as relações entre subprecificação e conservadorismo.

概要

我们研究国家层面的会计保守主义对国际IPO抑价的影响。研究来自36个国家的13,285个IPO,我们发现,在现有公共公司实行更多会计保守主义的国家IPO定价较低。保守主义和抑价之间的关系对于保守主义措施替代,国家平均回归,国家排除抽样,以及内生处理模型是强的。与保守主义通过减轻信息不对称的影响来减少抑价的假设一致,我们发现,较高国家层面的保守主义与较低国家层面的PIN值相关,并且保守主义和抑价之间的负关系对于信息不对称可能性高的小公司的IPO来说是最强的。最后,我们发现证据表明,法律起源,与保守主义实践相关联的一个因素,影响抑价和保守主义之间的关系。

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Figure 1
Figure 2

Note: Common- and civil-law countries are, respectively, sorted into terciles based on country-level conservatism. Bar heights represent the average country-level conservatism for the tercile. The lines show the average country-level IPO underpricing by tercile.

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Acknowledgements

The authors express their thanks for helpful comments to Wolfgang Bessler, Pawel Bilinski, Kenneth Borokhovich, Po-Chang Chen, April Knill (our Editor), Meziane Lasfer, Ashok Robin, Gil Sadka, Diana Shao, Zhe Shen, two anonymous referees, and seminar participants at the 2016 Special Issue of Journal of International Business Studies “The Role Of Financial And Legal Institutions In International Corporate Governance” Paper Development Conference, the 2015 Financial Management Association conference (Orlando), the 2015 Financial Management Association European Conference (Venice), the 2015 IFABS Corporate Finance Conference (Oxford): Institutions, Governance and Finance in Globally Connected Environment, the 2015 Paris Financial Management Conference, Cleveland State University, and Miami University. We are indebted to Bohui Zhang for providing data used in this study. Research funding was provided by the Lindmor Professorship (Boulton). Yao Yu provided valuable research assistance and Jaden Falcone provided valuable copy editing assistance. Any remaining errors or omissions are the responsibility of the authors.

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Correspondence to Thomas J Boulton.

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Accepted by April Knill, Guest Editor, on 25 October 2016. This article has been with the authors for three revisions.

Appendix: Variable definitions

Appendix: Variable definitions

Variable

Definition

Source

Panel A: Measures of conservatism

 

BPP Conservatism

BPP Response to good news

BPP Response to bad news

BPC Conservatism

BPC Response to good news

BPC Response to bad news

Conservatism, response to good news, and response to bad news measures are calculated using the approach in Bushman & Piotroski (2006) in estimating Eq. (1). BPP refers to estimates based regressions of country pooled firm-year observations and BPC refers to estimates based on cross-sectional averages of country annual regressions of firm-year observations

Bushman & Piotroski (2006)

BSP Conservatism

BSC Conservatism

BSP and BSC conservatism measures are calculated using the approach in Ball & Shivakumar (2005) and estimating Eq. (2). BSP refers to estimates based regressions of country pooled firm-year observations and BSC refers to estimates based on cross-sectional averages of country annual regressions of firm-year observations

Ball & Shivakumar (2005)

BM Aggregate

BM Median

BM Aggregate is the country-year-level sum of firm-year book values dividend by the sum of firm-year market values. BM Median is the country-year median firm-year book-to-market ratio for a country

Datastream & Compustat

Panel B: Dependent and control variables for underpricing regressions

 

IPO underpricing

IPO underpricing is the first-day secondary market closing price divided by the final offer price, minus one

Datastream

Offer size ($ mil.)

Offer size is the inflation-adjusted value of proceeds raised in millions of US dollars

SDC Platinum

Integer offer price

Top-tier underwriter

Book built

Firm commitment

Equity carve-out

High-tech industry

Indicator variables are set equal to one for IPOs that have an integer offer price, that have a top-tier underwriter that appears in the top 25 of SDC’s league tables in the issue year, that are book-built, that are firm commitment, that are an equity carve-out, and that are from a high-tech industry

SDC Platinum

IPO activity

IPO activity is the ratio of the total number of IPOs in the issue year divided by the number of listed equities for the country of listing as reported by The World Bank

SDC Platinum & The World Bank

Recent market return

Recent market return is the return on the Datastream index for the country of listing over the three months preceding the offering

Datastream

Stock market turnover

Stock market turnover equals the ratio of the total value of shares traded to aggregate market capitalization as reported by The World Bank

The World Bank

Index of economic freedom

Index of economic freedom is a product of The Heritage Foundation and The Wall Street Journal and is an aggregate measure covering the following ten freedoms: business, trade, monetary, freedom from government, fiscal, property rights, investment, financial, freedom from corruption, and labor

The Heritage Foundation & The Wall Street Journal

Anti-self-dealing index

Anti-self-dealing index is a measure of the legal protection afforded to minority investors against expropriation by corporate insiders

Djankov et al. (2008)

Panel C: Dependent and control variables for PIN regressions

 

PIN

PIN is the annual country-level probability of information-based trading (PIN) calculated using the Easley et al. (2002) methodology and provided by Lai et al. (2014)

Lai et al. (2014)

Individualism

Individualism is an index that aims to capture the degree of self-interest, self-reliance, and individual achievement versus a collective or group concern

Hofstede (2001)

Newspaper circulation

Log of GDP per capita measured in US dollars. GDP per capita is gross domestic product divided by midyear population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current US dollars

World Development Indicators

Log of GDP per capita

Stock market capitalization deflated by GDP. Market capitalization is the share price times the number of shares outstanding (including their several classes) for listed domestic companies. Investment funds, unit trusts, and companies in which the only business goal is to hold shares of other listed companies are excluded. Data are end of year values

World Development Indicators

Stock market capitalization

Ratio of private credit to GDP refers to financial resources available to the private sector. Private credit refers to financial resources provided to the private sector by financial corporations, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises

World Development Indicators

Ratio of private credit to GDP

Annual GDP growth is the annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2005 US dollars. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources

World Development Indicators

Annual GDP growth

Log of GDP per capita measured in US dollars. GDP per capita is gross domestic product divided by midyear population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current US dollars

World Development Indicators

Stdev. of annual GDP growth

Standard deviation of annual GDP growth is over the last 5 years

World Development Indicators

Stock market segmentation

Stock market segmentation is measured using Datastream and reported by Bekaert, Harvey, Lundblad, & Siegel (2011)

Bekaert, Harvey, Lundblad, & Siegel (2011)

Rule of law

Rule of law measures the strength and impartiality of the legal system and popular observance of the law

The World Bank Worldwide Governance Indicators

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Boulton, T.J., Smart, S.B. & Zutter, C.J. Conservatism and international IPO underpricing. J Int Bus Stud 48, 763–785 (2017). https://doi.org/10.1057/s41267-016-0054-8

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