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Urban Economic Openness and IPO Underpricing

Marcato, G; Milcheva, S; Zheng, C; (2018) Urban Economic Openness and IPO Underpricing. The Journal of Real Estate Finance and Economics , 56 (3) pp. 325-351. 10.1007/s11146-017-9613-4. Green open access

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Abstract

This paper represents a first attempt to employ a macroeconomic approach to explain the high and varying IPO underpricing within a single emerging market. We examine the empirical impact of trade openness on the short-run underpricing of initial public offerings (IPOs) using city-level data. Particularly, we argue that urban economic openness (UEO) has a significant impact on the productivity and on prices of both direct and indirect real estate due to productivity gains of companies in more open areas. This in turn positively affects the firm’s profitability, enhancing the confidence in local real estate markets and future company performance, hence decreasing the uncertainty of the IPO valuation. As a result, issuers have less incentive to underprice IPO shares. We use a sample of Chinese real estate IPOs, which offer a suitable laboratory thanks to their strong geographic investment patterns focused locally and a country with a highly heterogeneous openness across regions. Controlling for traditional firm- and issuing-specific characteristics of IPOs that are used for developed markets and Chinese-related features (i.e. listing location and state ownership), we find the evidence that companies investing in economically more open areas experience less IPO underpricing. Our results show great explanatory power and are robust to different specifications.

Type: Article
Title: Urban Economic Openness and IPO Underpricing
Open access status: An open access version is available from UCL Discovery
DOI: 10.1007/s11146-017-9613-4
Publisher version: https://doi.org/10.1007/s11146-017-9613-4
Language: English
Additional information: © The Author(s) 2017. This article is an open access publication
Keywords: IPO underpricing, Urban economic openness, Real estate
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment
URI: https://discovery.ucl.ac.uk/id/eprint/1571863
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