Title: Does the legal system affect the cost of external financing? Evidence from IPO underpricing of foreign firms listed in US stock markets

Authors: Shaokang Wang; Jing Jiang

Addresses: Jay S. Sidhu School of Business and Leadership, Wilkes University, Wilkes-Barre, PA 18766, USA ' Department of Economics and Finance, Jack Welch College of Business, Sacred Heart University, Fairfield, CT 06825, USA

Abstract: To study the effect of the legal system on the cost of external financing, we examine the degree of underpricing of the IPOs by foreign companies listed in the USA. We find that firms from highly corrupted countries have larger IPO underpricing. The quality of the home countries' public law enforcement reduces the degree of IPO underpricing. In particular, the criminal sanction for violations of securities laws is the most significant factor in reducing underpricing. The evidence shows that even when a non-US firm meets sophisticated US regulations and goes public in a US exchange, the degree of underpricing is still influenced by the legal and judicial system in the home country. Following La Porta et al. (2000a), we provide evidence against the functional convergence hypothesis (Coffee, 1999 and 2002).

Keywords: IPO; underpricing; functional convergence hypothesis; law and finance.

DOI: 10.1504/IJEBR.2019.101312

International Journal of Economics and Business Research, 2019 Vol.18 No.2, pp.186 - 214

Received: 03 Jul 2018
Accepted: 05 Sep 2018
Published online: 31 Jul 2019 *

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