The impact of cultural factors and accounting choices on IPO underpricing

A well-documented empirical phenomenon in the initial public offering (IPO) market is underpricing. Evidence also suggests that greater underpricing is positively related with higher ex ante uncertainty, which can be represented by proxies, e.g., firm's age, underwriter's reputation, etc. However, none of the empirical studies have incorporated cultural factors and accounting practices as proxies. Based on one prominent model, i.e., Rock's model (1986), this study develops an empirical Ex Ante Uncertainty model to establish the efficacy of cultural factors and accounting choices as proxies for ex ante uncertainty. Further, an Uncertainty Proxy and Underpricing model is established to test directly the impact of cultural factors and accounting choices on the level of underpricing.; The interest in the influence of cultural factors and accounting choices on stock market returns arises from the internationalization processes of both equity markets and accounting practices. This study is, thus, motivated by the significant size and increase of foreign corporate listings on the U.S. stock markets. Its focus are two fold: one is to test the efficacy of cultural factors and accounting practices as proxies of ex ante uncertainty and the other is to investigate the impact that cultural factors and accounting choices may pose to the initial capital returns on foreign listings.; Based on the empirical results from 468 IPOs (234 U.S. and 234 non-U.S.), the following conclusions are drawn: (1) In the U.S. stock market, IPOs are on the average underpriced, including both U.S. and non-U.S. IPOs; (2) Nationality as well as cultural factors can capture ex ante uncertainty AND can be used as proxies; (3) Accounting choices in general and GAAP in particular can also be used to proxy for ex ante uncertainty; (4) The efficacy of ex ante uncertainty proxies have different levels with the number of risk factors at the highest level, underwriter reputation at the lowest level and others in between; (5) IPOs with a high degree of uncertainty avoidance tend to choose non-U.S. GAAP; (6) IPOs with a high degree of individualism tend to choose U.S. GAAP; (7) IPOs with a high degree of masculinity seem to choose U.S. GAAP more often; and (8) U.S. IPOs appear to underprice more than non-U.S. IPOs.