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CRIEFF Discussion Paper Number 1301

Minimal Capital Requirements and Domestic Credit Extension as Determinants of IPO Underpricing: Robustness and Policy Implications in a World-wide Cross Section Model

Morten Dyrmose and Gavin C Reid (University of St Andrews) 

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This paper presents a new model of IPO underpricing. It is a cross section model estimated over all the major countries of the world, including the rapidly advancing BRIC nations. The model explains IPO underpricing by three types of variables, economic, demographic and institutional. We …find that two variables are particularly important: minimum capital requirements to start a business (MCR), and domestic credit extension, as measured by private sector development (PSD). These variables are both highly statistically signfi…cant, and are positively correlated with IPO underpricing. They also have high elasticities in that a 10% reduction in MCR would reduce IPO underpricing by about 3% and a 10% reduction in domestic credit expansion would reduce IPO underpricing by about 2.5%, other things being equal. These results are shown to be statistically robust.

JEL codes: C21, C52, G14, G34

Keywords: IPO underpricing, world model, minimum capital requirements, private sector development.

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