Institutional Environment, Firm Ownership and IPO First-Day Returns : Evidence from China

We examine two inconclusive issues in the IPO underpricing literature. It is unclear if private firms or government-owned firms (SOEs) underprice their IPOs more and how institutional environment affects IPO underpricing. Using a much larger China IPO sample of SOEs, we conclude that SOEs underprice their IPOs more. Specifically, SOEs controlled by the central government (CSOEs) underprice their IPOs 27 percentage points more than that of private firms whereas SOEs controlled by local governments (LSOEs) underprice 7 percentage points more. Using the National Economic Research Institute Index of Marketization (NERIIM) to measure institutional environment, we find that one index score improvement in institutional environment associates with a two percentage-point reduction in IPO underpricing. Importantly, better institutional environment reduces IPO underpricing most effectively for private firms, followed by LSOEs, and the least for CSOEs