Disclosure Regulation and IPO Underpricing: An International Analysis

Initial public offerings (IPOs) are on average underpriced in almost every country around the world. Despite the presence of a vast body of IPO literature, little is known about IPO performance in an international context. This study examines whether country-specific IPO disclosure regulation affects the extent of IPO underpricing. Our empirical analysis uses a unique international IPO sample of 6,025 IPOs from 34 countries over the period 1995 to 2002. We show for the first time that IPO underpricing is on average negatively associated with disclosure requirements for the IPO prospectus, after controlling for various determinants of underpricing. Moreover, we find that the disclosure effect is significantly smaller in countries with strong auditing regimes, suggesting that auditor quality and disclosure regulation are substitutes for resolving information asymmetry. In contrast, we find no evidence that the extent of capital market integration has any incrementally significant effect on the disclosure underpricing relation. Taken together, we provide new evidence consistent with the view that increased disclosure regulation reduces information asymmetries and consequently lowers the cost of new equity.