HCBE Faculty Articles

Corporate fraud and industry peer effects on IPO underpricing

Document Type

Article

Publication Date

5-31-2023

Publication Title

International Journal of Managerial Finance

ISSN or ISBN

1743-9132

Abstract/Excerpt

Purpose

Existing studies suggest that negative impacts emanating from corporate fraud revelations may diffuse to other firms through lower trust and lower market participation. Extending this literature stream, the authors examine whether corporate fraud revelations are associated with higher costs of raising capital through initial public offerings (IPOs) for industry peers.

Design/methodology/approach

The authors employ several analysis techniques including univariate analysis, multivariate regressions, propensity score matching methodology, and probit estimation. The sample consists of 3,015 US IPO firms for the 1996–2021 period.

Findings

By adopting US private securities class action lawsuits as a proxy for the presence of corporate fraud, the authors find that fraud revelations are associated with higher IPO underpricing, higher post-IPO stock return volatility and increased likelihood of withdrawal from the offering for industry peers. The findings are robust to alternative industry definitions and litigation proxies and to the inclusion of a battery of controls, including industry, state and year fixed effects.

Originality/value

This study presents private firms with an additional industry litigation factor to consider when assessing the marginal costs of going public.

DOI

10.1108/IJMF-10-2022-0430

Comments

Acknowledgements

The authors thank an anonymous referee whose comments and suggestions helped to improve the paper.

Peer Reviewed

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