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Does the appointment of the three musketeers reduce IPO underpricing? global evidence

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Abstract

This paper examines impact of hiring reputable auditors, underwriters, and lawyers, “namely, the three musketeers”, by issuing firms on the global IPO underpricing. We employ large and unique dataset of 24,312 IPOs in 22 countries between 1995 and 2019. We find that issuers benefit from hiring the three musketeers to certify issuers’ quality to reduce investors’ ex-ante uncertainty to guard their offerings from underpricing. Results show significant differences of the impact of the three musketeers on underpricing in countries with different market sophistication, auditing and reporting standards, and rule of law. Our results reveal that issuers may want to be careful when hiring quality auditors, underwriters, and lawyers when going public since not all those reputable intermediaries are equally important in alleviating underpricing. Our research has implications for IPO owners, investors, researchers, and regulators.

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Notes

  1. We perceive the involvement of the reputable auditors, underwriters, and lawyers as background guarding agents. They are “the three musketeers” who work to protect the wealth of IPO issuing firms from possible excessive underpricing by IPO investors.

  2. There is another strand of research which argues that auditing firms’ reports do not truly contain conclusive information about their prospects, so essentially, audit reports are mere testimony (Hughes, 1986; Datar et al., 1991; Spathis, 2002; Francis, 2004; Chung et al., 2019). The authors believe that auditing firms regardless of their reputation tend to grant a ‘good opinion’ to all public-going firms because of ongoing negotiations between IPO owners and auditing companies.

  3. There are existing research documents which are evidence of a positive and no correlation between reputable underwriting banks and the level of IPO underpricing (Beatty & Welch, 1996; Loughran & Ritter, 2004; Boulton et al. 2017).

  4. Jamaani and Ahmed (2021) describe developing (developed) countries as having weak (strong) market sophistication.

  5. For further discussion about what is known as spinning practice, see the distinguished work of Liu & Ritter (2010).

  6. The G20 economies were chosen because they provide a varied and diversified dataset for rigorous testing of research hypotheses. The G20 is a yearly summit for 20 major developed and emerging economies to improve international collaboration and coordination (The G20 China 2016). The G20 comprises some of the European Union countries including, the United Kingdom, Italy, France, Poland, Germany, Denmark, Bulgaria, Greece, Slovenia, Spain, Romania, and Sweden. It also includes Argentina, India, South Korea, Australia, the United States, Mexico, South Africa, Brazil, Russia, Turkey, Canada, Indonesia, Japan, China, Saudi Arabia. Bulgaria, Slovenia, Spain, Romania, and Argentina are excluded due to lack of IPO data. The G20 countries’ size and scale in the international economy attracts research and practice (Johannesen & Zucman, 2014; Jamaani and Ahmed 2022). In 2014, the G20 countries contributed over 80% of global GDP, while its stock markets accounted for almost 80% of world market value (The World Bank Group 2015). Almost 76% of worldwide listed businesses were traded on G20 stock exchanges and nearly 25,000 IPOs were launched on G20 stock exchanges, representing 79% of all worldwide IPOs between 1995 and 2014 (The World Bank Group 2015). The final dataset includes a selection of 22 countries.

  7. We follow Banerjee et al., (2011) to replace the first week closing price when data for the first day closing price is missing.

  8. We would like to express our appreciation to the anonymous reviewers for encouraging us to examine the consistency of findings obtained after removing insignificant variables from Table 3.

  9. We would like to express our gratitude to the anonymous reviewers for encouraging us to investigate adding three extra indicator variables to account for the combination of two of the three musketeers’ variables.

  10. We appreciate the anonymous referees for suggesting us to investigate dividing the sample into sub-samples to check whether the overall findings remained valid.

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Acknowledgements

The author wishes to express personal gratitude to the Deanship of Scientific Research at Taif University, especially to Dr. Walaa Alsanie, Dean of Scientific Research, for his motivation and assistance throughout the project. This study was funded by Taif University’s Researchers Supporting Project (TURSP-2020/337), Taif, Saudi Arabia. Additionally, the author wishes to express gratitude to the anonymous reviewers for their insightful remarks that helped to moderate this work and, as a result, significantly improved the manuscript.

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  1. Department of Economics and Finance, College of Business Administration, Taif University, P.O. Box 11099, 21944, Taif, Saudi Arabia

    Fouad Jamaani

  2. Department of Accounting, College of Business Administration, Taif University, Taif, Saudi Arabia

    Manal Alidarous

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Jamaani, F., Alidarous, M. Does the appointment of the three musketeers reduce IPO underpricing? global evidence. Eurasian Bus Rev 13, 887–929 (2023). https://doi.org/10.1007/s40821-022-00219-y

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