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Impact of investors’ protection, transparency level and legal origin on initial public offering (IPO) initial returns

Sheela Sundarasen (Accounting Department, Prince Sultan University, Riyadh, Saudi Arabia)
Sanjay Goel (Department of Management Studies, University of Minnesota Duluth, Duluth, Minnesota, USA)
Fairuz Ahmad Zulaini (Graduate School of Management, Multimedia University, Cyberjaya, Malaysia)

Managerial Finance

ISSN: 0307-4358

Article publication date: 10 July 2017




Managers may underprice initial public offerings (IPOs), leading to higher initial returns (IRs). The purpose of this paper is multi-fold: to compensate investors for risk, to reduce litigation risk, as well as to maintain control over the firm. The authors examine country-level contingencies (degree of investor protection, legal origin and degree of transparency) in OECD countries to explain IPO IRs.


Cross-sectional data comprising of 4,164 IPOs from 28 OECD countries are used for the period of 2005-2010. Ordinary least square using multiple linear regressions is used to test the hypotheses.


Investors’ protection is associated with higher IRs. This relationship is stronger in the non-common law countries. Degree of transparency negatively moderates the relationship in common law countries. Overall, the results show evidence of risk compensation, litigation risk reduction, and managerial control motives in underpricing.


IPO IRs in OECD countries is examined, within the boundaries of institutional characteristics, i.e., investors’ protection, legal origin and transparency level.



Sundarasen, S., Goel, S. and Zulaini, F.A. (2017), "Impact of investors’ protection, transparency level and legal origin on initial public offering (IPO) initial returns", Managerial Finance, Vol. 43 No. 7, pp. 738-760.



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