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

Abstract

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%.

Keywords: Financial Markets, Underpricing, Cultural Dimensions.

DOI: 10.7176/RJFA/11-6-06

Publication date:March 31^st 2020