The following post comes to us from Thomas Boulton of the Finance Department at Miami University, Scott Smart of the Finance Department at Indiana University, and Chad Zutter of the Finance Department at the University of Pittsburgh.
In the paper, Earnings Quality and International IPO Underpricing, forthcoming in The Accounting Review, we examine the impact of country-level earnings quality on IPO underpricing. When firms convert from private to public ownership through an initial public offering (IPO), they typically sell shares at a price that is below the market price that prevails once secondary market trading begins. This “underpricing” cost, which is prevalent in virtually every stock market around the world, is one of the largest costs that firms must bear when going public. Underpricing also varies widely between countries.