How a pre-IPO audit committee improves IPO pricing efficiency in an economy with little value uncertainty and information asymmetry

Lanfeng Kao and Anlin Chen

Journal of Banking & Finance, 2020, vol. 110, issue C

Abstract: We examine the effect of a pre-IPO audit committee on IPO pricing from the perspectives of information asymmetry and agency problems. We propose a bargaining power hypothesis to disentangle the information asymmetry explanation (financial reporting quality) from the agency problems explanation (underwriter bargaining power) on IPO pricing. IPO underpricing can be reduced by increasing the financial reporting quality under information asymmetry and/or by decreasing the underwriter bargaining power under agency problems. An audit committee can raise the quality of financial reporting and reduce the bargaining power of underwriters. With a pre-IPO market, the IPO markets in Taiwan have little information asymmetry, thus leading to the weak importance of reducing information asymmetry. We show that the establishment of a pre-IPO audit committee improves IPO pricing efficiency by reducing underwriter bargaining power rather than by raising the quality of financial reporting in Taiwan.

Keywords: Audit committee; Financial reporting quality; Initial public offerings; Price discount; Underpricing; Underwriter bargaining power (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:110:y:2020:i:c:s0378426619302626

DOI: 10.1016/j.jbankfin.2019.105688

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