The effect of language on IPO underpricing: Evidence from a multinational research

This paper examines how language characteristics affect initial public offerings (IPO) underpricing. We conjecture that Future-Tense Reference (FTR) language characteristics will informally influence human cognition of future rewards, raise their investment sentiment, and thus affect IPO underpricing. Using a sample of 33,414 IPOs in 30 countries, we find evidence that issuing firms operating in weak-FTR environments tend to experience a higher level of underpricing than those in strong-FTR settings. Our results remain robust after controlling for other linguistic and cultural characteristics, using various fixed-effect structures, and adopting the instrumental variable approach. The positive relationship between weak FTR and IPO underpricing is less pronounced in countries (regions) with higher education levels and higher institutional shareholding ratios, supporting the role of FTR on human cognition. Furthermore, our findings provide evidence supporting that the linguistic characteristic of FTR can impact firms' IPO decisions and the market's liquidity. Overall, the result highlights the importance of informal linguistic characteristics in explaining global IPO underpricing differences.