Local policy risk and IPO performance

Colak, Gonul and Gounopoulos, Dimitrios and Loukopoulos, Panagiotis and Loukopoulos, Georgios (2019) Local policy risk and IPO performance. In: 2019 Financial Management Association European Conference, 2019-06-12 - 2019-06-14.

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We investigate how the realignment in political landscape (local policy risk) increases IPO underpricing. Using the concept of corporate proximity to political power, we find that local policy risk amplifies adverse selection problems, which leads to higher underpricing. Economically, a shift on the political map from an area completely opposed to the rulingparty to being completely aligned translates to $12 million left on the table for the average issuer. While politically active firms successfully manage this policy realignment risk, the other firms bear majority of its consequences. We also demonstrate considerable heterogeneity onthe impact of uncertainty emanating from the dynamic nature of the political landscape across industries, states, and firms. Lastly, we document that policy risk has a substantial adverse impact on the survival of IPO issuers.