Firm location effect on underwriting, subscription, and underpricing: Evidence from IPOs in China

This study examines the effect of a firm's geographic proximity to its monitoring entities for Chinese IPOs. While prior literature identifies the effect of location on underpricing, we do not fully understand the channels causing the difference in underpricing. We hypothesize that the high expected cost of monitoring remote firms should lead to (a) choosing a less prestigious underwriter and (b) weaker demand from investors at the time of the IPO. Both these factors, in turn, should lead to a higher underpricing for remote firms. We test this conjecture using 1842 Chinese IPOs from 2005 to 2017 and find results consistent with our arguments. We find that remote firms, which have higher underpricing, are managed by less prestigious underwriters and have significantly lower subscriptions, particularly from retail investors. Our results, robust to propensity score matching and a two-stage least square instrument variable approach, are important for policymakers desiring equitable development.