Does Culture Play a Role on Underpricing? A Study on 47 Capital Markets

Culture can be defined as all living and thinking assets that separate one country from others. These material and spiritual features that come from the past and encompass the future determine the viewpoints and characteristics of nations. Although increasing globalization with the influence of the internet age brings each society a little closer, the cultural differences of the countries are preserved. In recent studies, the influence of culture has been observed in the fields of personal finance and capital markets, as well as in other areas of life. Initial public offerings are a way for companies to enter capital markets and this is a turning point for many firms. Companies initiate IPOs in order to increase their prestige, enhance their exporting volume, or maintain a better position among their competitors. It is important to manage this process efficiently with the appropriate pricing. Considering the public offerings that take place worldwide, underpricing draws attention almost anywhere. Underpricing, which is the difference between the public offering price and the first day closing price, has found wide coverage in the financial literature. Although, studies on the role of culture in underpricing have increased only in recent years. In this study, the potential cultural impact on underpricing in the initial public offerings at 47 countries was measured by the cultural dimensions of Hofstede. Results show that, power distance and underpricing has positive relationship at the level of 39%, with 0.01 significance. In countries where democracy hasn’t felt enough and inequality has increased, underpricing has been boomed due to the faulty trust among capital market players. In addition, 32.6% negative relationship was determined between individualism and underpricing, with 0.05 significance. Compared to countries where individuals are living in groups, it has been found that there is less underpricing at countries where individuals are more confident personally. Also, in the regression analysis of Hofstede's six cultural dimensions, it was observed that the power distance explained the underpricing by 39%.

The difference between the public offering price and the closing price on the first day is called underpricing in the literature (Ibbotson, 1975). The underpricing of IPOs have been scrutinized starting from the study of Stoll and Curley (1970). Since then, more researchers have been questioning the reasons behind underpricing of IPOs. Some researchers have stated that this syndrome is caused by the difference of information between investors (Rock, 1986). In the markets where information asymmetry exists, the investors who do not have enough information decide on low-quality IPOs, while informed investors prefer initial public offerings with high potential.
Underpricing in capital markets is also explained by the signal theory (Grinblatt and Hwang, 1989). Companies are deliberately paving the way for underpricing in order to leave a better taste in the mouth of investors. According to this theory, firms want to start an efficient journey on capital markets by attracting more investors' attention at the start and creating a magnetic effect. In addition, the cost of underpricing is less for large and high quality firms than for small and new firms. This situation attracts investors to IPOs that have more underpricing. Those who advocate this theory state that there is a direct proportion between underpricing and the quality of the company.
Underwriters play a key role as intermediaries in the initial public offering process. Some of the studies on underpricing in the literature have focused on underwriters because of both their liquidity and price stability tasks in public offerings (Loughran and Ritter, 2002). Attracting investors with lower underpricing and more accurate pricing through more established and reputable underwriters is advocated as a public offering strategy for companies by researchers. In addition, having high market share and being consortium leader could affect the degree of underpricing, when it comes to underwriters. Firm or country specific reasons also effect underpricing (An and Chan, 2008).
The underpricing reasons vary according to countries economical and political backgrounds. Even though underpricing can be perceived distinctivelty at different countries, this phenomenon can still gives an insight about the financial capital markets. In a study, the potential impact of corporate governance changes between countries on public offerings examined and it was concluded that underpricing is higher in countries with better corporate governance (Boulton, 2010). The relationships between social variables like cultural diversity and underpricing have been studied as a new trend in the literature. Having previously offered to the public in their original countries appears to be a factor that reduces underpricing for foreign issuance companies in diversified financial markets such as US (Chui et al., 2010).

The Role of Culture on Underpricing
Culture can be clarCfCed the package of standards that shape people's psychology, behavCor, habCts and Cs specCfCc to a partCcular country or group (Zhou et. al., 2019). In behavCoral fCnance Ct Cs crucCal to analyze Cnvestors feelCngs. Geert Hofstede's cultural dCmensCons are a way to benchmark cultures wCth sCx dCfferent crCterCas (Han et al., 2010). Hofstede (1980), conducted a research on IBM employees from more than 70 countries, and used four criterias in order to point out their differences and create a national culture map. These criterias are stemming from problems that arise in all societies. They are also in harmony with the Kluckhohn and Strodtbeck's (1961) first quantitative cultural research. The first 4 criterias are; power distance, individualism, masculanity, and uncertainty avoidance. Long term orientation and indulgence criterias are added to the model afterwards (Hofstede and Bond, 1988).
Power Distance evaluates equality and inequalities among citizens. If people believe that power is not distributed equally among citizens, then the power distance arises. At countries with high power distance scores, people tend to accept hierarchical orders with ease and they don't demand for equality. At low power distance countries, people prefer to fight for inequalities and they request more equilibrium in their lives. Studies on power Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.11, No.6, 2020 distance show that individuals have less social trust in societies where more hierarchy is in operation, therefore, in capital markets where there are conflicts of interest, firms prefer more underpricing to increase their attractiveness and to maintain a healthy issuance process (Grinblatt and Huang, 1989).
Individualism criteria concentrates on group interests among people. This dimension interprets peoples' perspectives about whether or not taking care of others is substantial for them. At countries which has higher scores of individualism, people lean towards mosty taking care of themselves and their families. At lower degree individualism countries, people prefer the safety of being in a group, and consequently they look after their relatives and group members. In the studies examining the individuality dimension, it is observed that in higher individualism countries, individuals appreciate the implementation of risky strategies if companies have some future benefits from them (Griffin et al., 2013). From this point of view, companies play it more safely in countries with low individuality and agree to be offered with aggressive underpricing in order to realize a more successful issuance.
Masculinity measures a countrys' position when it comes to gender inequalities. Leadership, heroism and success coming with harsh feeling is important for more masculine nations. Competitiveness is the characteristic feature of these countries. On the other hand, some nations prefer more synergy, group thinking, togetherness and life quality. Cooperation is the hallmark of feminine nations. Researches on masculinity dimension shows that, at countries with higher masculinity ratings, managers with higher self-confidence implement excessive rate of underpricing, believing that they will earn sufficiently after issuance (Lougran & Ritter, 2002). According to another study, men were found to be more likely to take risks than women, especially when it comes to financial decisions (Powell & Ansic, 1997). Since it is directly proportional to taking risks, overdose of underpricing is expected in countries with higher masculinity.
Uncertainty avoidance criteria demonstrates how members of a country reacts when uncertainty and ambiguity appears. Some nations are at peace with their future, even though they don't fully know what will happen next, they prefer to concentrate on their present day and live their lives as they come. However, the situation is completely different at risk averse countries; people try to control their future, live with principles, don't accept new ideas or concepts with ease. Companies which are seeking to minimize risk aversion in their investors, especially use experienced bankers and underwriter firms in their issuances. A study shows that an increase in the number and status of the brokerage firms has decreased the exposure of stocks to underpricing (Carter & Manaster, 1990). Additionally, another research clarified that public offerings, which are not seen as risky as others, are underpriced less (Ritter, 1984).
Long term orientation dimension expresses how a nation deals with change against tradition. Norms and past habits are vital for some countries. This type of nations' members mostly believe that truth is absolete, and they resist change. Conversely, some countrys are more adaptive and dynamic when it comes to change. People believe in freedom of thought and think that truth is relative. And finally, indulgence factor displays whether individuals of a society live through their lives with the sole purpose of enjoyment or strictness. Process of enjoying life to the limit is substantial for the members of high indulgence societies. These people tend to spend more money, and ultimately increase the level of supply and demand. In other respects, at low indulgence countries people tend to underrate pleasure and overrate social norms and rules. Individuals of these societies prefer spending less money.
According to previous researches, cultural background has a potential of affecting investors' perception of legal protection, portfolio preferences and returns, dividend payout ratios as well as underpricing of initial public offerings. There are many studies based on the fact that culture plays a very vital role in forming the basis of the financial systems of countries (Kwok and Tadesse, 2006;Aggarwal and Goodell, 2009). For example, the financial systems of the countries, which consist of individuals who like to avoid risks and can be described financially as safe investors, are mostly based on the banking system. Chang and Noorbakhsh (2009) and Ramirez and Tadesse (2009) conducted studies showing that culture affects the level of cash retention in individuals. Chui et al. (2010), on the other hand, based on Hofstede's individualism criteria, examined the role of culture in differentiating investment returns between countries.  Ritter, J.R., & Rydqvist, K. (1994). "Initial Public Offerings: International Insights", Pacific-Basin Finance Journal, 2, 165-199 (The data has been updated in 2015 by the same author), and Hofstede, G. (2017). Cultural Dimensions/National Culture < hofstede-insights.com/> Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.11, No.6, 2020  In order to find which cultural dimension variable effects underpricing robustly, a regression analysis has been implemented. Stepwise method has been chosen to eliminate insignificant variables. So the following model is formulated: Underpricing = β0 + β1 * Power Distance + β2 * Individualism + β3 * Masculinity + β4 * Uncertainty Avoidance + β5 * Long Term Orientation + β6 * Indulgence + ε According to the regression analysis power distance is the only variable which is statistically robust at explaining underpricing, as seen on Table 3. These findings are in accordance with previous studies (Costa et al., 2013;Chourou et al., 2018). It can be said that equality among people in terms of democracy, brings more stability to the financial markets. When individuals of the nation feels more secure, this makes the financial system more credible and efficient as a consequence. The results in this study showed that, apart from other internal and external market dynamics, only culture itself has an important and pivotal role in explaining the capital markets and investors behaviour. It is possible to predict the market performances companies that will enter a specific capital market, to a certain extent. Adding cultural dimensions according to cultural background of nations into underpricing analysis of different countries, may further strengthen the forecasts of shares' price trends.

Conclusion
Underpricing is a widely researched phenomenon which can be seen from undeveloped nations markets to developed countries stock exchanges. In theory, companies don't want to leave their money on the table, but still underpricing occurs. Plenty of factors could be in play as the literature suggests, ranging from underwriting agencies to the firms age when they became publicly listed. But in order to understand one nations stock market, could we also look at its cultural characteristics? This study tries to answer this question.
The power distance criteria focuses on the inequality felt among people. The increase in inequality brings a decrease in social trust throughout the society (Bjornskov, 2008). Increasing conflicts of interest and decreasing social trust among companies, underwriters and investors cause underpricing to be more severe (Chambers and Dimson, 2009). The individualism dimension concerns whether individuals who compose the society prefer to be in a group or not. Companies tend to make more underpricing at their IPOs, in order to attract more investors at Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.11, No.6, 2020 issuance in countries with lower individualism. Such as, in China and Saudi Arabia, where individualism is lower, it is observed that companies do not strive to execute public offerings at higher prices, just like during the Internet bubble in US (Chen et al., 2015). For this reason, in countries where individualism is lower, underpricing is higher. At this research, no significant relationship was found between the other Hofstede cultural dimensions and underpricing.
In this study, the potential role of culture in the formation of underpricing syndrome was examined. In the cultural analysis of 47 countries' IPOs, only power distance and individualism criteria gave statistically significant results with underpricing. The relationship between underpricing and power distance is at 39%, and significant at the level of 0.01; while the correlation between underpricing and individualism is at -32.6%, and significant at 0.05 level. In addition, the power distance criteria explains 39% of underpricing at the regression analysis. These results are in line with the previous literature examining the relationship between financial markets and culture (Chambers and Dimson, 2009;Zheng et al., 2013).
For further research, each country could be analyzed with supportive variables like legal background. The number of countries can be increased and they can be analyzed within different classifications based on their region and development level. The interaction between countries who has close trade relationships could be examined with foreign IPO performance at their capital markets. Results show that culture has an impact on underpricing, so cultural dimensions should be used in analyzing country specific capital markets.