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The insurance effect of IPO underpricing on litigation risk revisit: a discussion of instrumental variables

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  • Yun Zhu

Abstract

The litigation risk hypothesis of initial public offering (IPO) underpricing suggests that issuers underprice IPOs in an effort to avoid costly litigation, and, therefore, that underpricing should be greater for issuers with ex-ante higher levels of litigation risk. Using passage of the Private Securities Litigation Reform Act in 1995 and lawsuit growth rate as instrumental variables, we find that the reported systematic link between litigation risk and IPO underpricing no longer exists in the sample of either traditional IPO cases or IPO allocation cases. Furthermore, we illustrate that the previously found significant relationship between these two is not persistent but rather is driven primarily by the choice of the instrumental variable.

Suggested Citation

  • Yun Zhu, 2012. "The insurance effect of IPO underpricing on litigation risk revisit: a discussion of instrumental variables," International Journal of Business Innovation and Research, Inderscience Enterprises Ltd, vol. 6(4), pages 458-479.
    • Handle: RePEc:ids:ijbire:v:6:y:2012:i:4:p:458-479
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