Litigation risk, underpricing, and money-losing IPOs

Carène Boucher, Maher Kooli and Thomas Walker

Global Finance Journal, 2023, vol. 55, issue C

Abstract: We examine the impact of firms' pre-IPO earnings on the relationship between litigation risk and IPO underpricing. We confirm the insurance effect of the lawsuit avoidance hypothesis; however, we find that the use of underpricing to reduce litigation risk is mainly associated with firms with negative earnings at the time of going public. Our results are robust to the timelines over which sample firms were sued, alternative underpricing measures, the addition of various control variables to our baseline regression models, and different proxies to categorize IPO firms. We also investigate the relationship between litigation risk, pre-IPO earnings, and underwriter gross spreads. The results indicate that, when dealing with firms facing a high risk of litigation, underwriters charge significantly higher spreads to negative-earnings issuers than profitable IPO firms.

Keywords: Initial public offerings; IPO underpricing; Securities litigation; Earnings; Lawsuit avoidance (search for similar items in EconPapers)
JEL-codes: G24 G32 K22 K40 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:55:y:2023:i:c:s104402832300008x

DOI: 10.1016/j.gfj.2023.100813

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