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Financial Literacy and IPO Underpricing

Published online by Cambridge University Press:  10 March 2023

Xiaoran Jia ,
Kiridaran Kanagaretnam Open the ORCID record for Kiridaran Kanagaretnam [Opens in a new window] ,
Chee Yeow Lim  and
Gerald J. Lobo
Xiaoran Jia
Affiliation:
Wilfrid Laurier University Lazaridis School of Business and Economics xjia@wlu.ca
Kiridaran Kanagaretnam*
Affiliation:
York University Schulich School of Business
Chee Yeow Lim
Affiliation:
Singapore Management University School of Accountancy cheeyeowlim@smu.edu.sg
Gerald J. Lobo
Affiliation:
University of Houston C.T. Bauer College of Business gjlobo@uh.edu
*
KKanagaretnam@schulich.yorku.ca (corresponding author)
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Abstract

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Using an international sample of IPO firms and two country-level measures of financial literacy, we find strong evidence that financial literacy is negatively associated with IPO underpricing. In cross-sectional analyses, we find that the effect of financial literacy in reducing IPO underpricing is more pronounced when the information environment is less transparent. Employing path analysis, we document that information friction, firm transparency, and stock market participation are mechanisms that mediate this relationship. Our study contributes to and extends the literature by providing strong evidence that citizens’ financial literacy has an important and consistent influence on IPO underpricing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 3 , May 2024 , pp. 1430 - 1469
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Jarrad Harford (the editor) and an anonymous reviewer for their constructive and helpful suggestions. Kanagaretnam thanks the Social Sciences and Humanities Research Council of Canada (SSHRC) for its financial support.

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