The psychological and economic roles of culture on global underpricing difference: A new hierarchical evidence

This paper investigates the ongoing phenomenon of Initial Public Offerings (IPOs) underpricing in cross-country setting by focusing on how national cultures can exert direct and indirect influences on global underpricing difference. In the IPOs market, participants navigate between two types of information asymmetry that attributes to the existence of underpricing difference across countries. Commonly explored are internal category of information asymmetry related to firm-level characteristics and the external category associated with the characteristics of national cultures is less understood. We capture the hierarchical structure of the data across different cultural environments by employing a full Hierarchical Linear Modelling (HLM). We employ 10,212 IPO-issuing firms over 22 years covering 12 advanced, and 10 emerging countries. We find that variations in cultural dimensions measuring the psychological and economic roles of culture directly explain up to 0.999 and 0.980, respectively, while firm-level factors only explain up to 0.097 of the variability in IPO underpricing. Our results produce exclusive evidence showing that culture indirectly influences underpricing variance in three ways: first, by modifying the correlation between the incentive of IPO issuers and underpricing by up to 0.154; second, by modifying the relationship between underwriter reputation and underpricing by up to 0.010; and third, by modifying the association between ex-ante uncertainty surrounding the offering and underpricing by up to 0.273. The findings contribute to the emergent and underdeveloped literature on the association between national cultures and underpricing of IPO firms in the global market.