Initial Public Offerings of State-Owned Enterprises: An International Study of Policy Risk

Policy risk, rather than information asymmetry, explains the cross-sectional underpricing of privatized initial public offerings. The issuer governments of high policy risk issues tend to retain a large equity stake and underprice more with underpricing increasing in retained equity. While the issue...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2007-06, Vol.42 (2), p.313-337
Main Authors: Lam, Swee-Sum, Tan, Ruth Seow-Kuan, Wee, Glenn Tsao-Min
Format: Article
Language:English
Subjects:
Asymmetric information
Bureaucracy
Capital markets
Enterprises
Equity
Finance
Financial risk
Government bureaucracy
Government programs
Industrial regulation
Information asymmetry
Initial public offerings
Investment risk
Investors
Policy making
Pricing
Privatization
Public enterprise
Stocks
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Summary:Policy risk, rather than information asymmetry, explains the cross-sectional underpricing of privatized initial public offerings. The issuer governments of high policy risk issues tend to retain a large equity stake and underprice more with underpricing increasing in retained equity. While the issuer government's retained equity is an observable signal for policy risk, we find that the quality of a country's bureaucratic machinery is a more intuitive and practical measure of policy risk. Policy risk also explains the absence of a systematic relation between the initial returns on privatized and private initial public offerings.
ISSN:0022-1090
1756-6916
DOI:10.1017/S002210900000329X