Language similarity and IPO underpricing

In this study, we investigate whether language similarity between auditors and chairpersons mitigates IPO underpricing. We focus on China, a country with a high incidence of IPO underpricing. We define language similarity as the auditor and the chairperson sharing the same dialect. To measure this, we manually collect the identification (ID) numbers of auditors and chairpersons and construct a proxy for language similarity based on the birthplaces identified by their ID numbers. Our findings indicate that auditor-chairperson language similarity helps alleviate IPO underpricing. We also find that IPO companies are more likely to select auditors who share the same language with their chairpersons. Our results remain robust even after controlling for additional control variables and employing matching methods, 2SLS instrumental variables, and alternative measurements. The mechanism through which language similarity reduces IPO underpricing is by compensating for informational gaps in low-readability and high-similarity prospectuses through incremental information production. Furthermore, the effects of language similarity are more pronounced when IPO companies are audited by Big 10 audit firms, followed by greater analyst coverage, and are listed under the registration-based IPO regime. Our research confirms the significant role of language similarity in emerging capital markets.

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Publication Details

Journal
European Journal of Finance
Published
2024-12-12
DOI
https://doi.org/10.1080/1351847x.2024.2439992
Primary Topic
Corporate Finance and Governance
Type
article
Field-Weighted Citation Impact
0.00

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article

Language similarity and IPO underpricing

Pu Zhao, Haoyu Wang, Chen Feng
European Journal of Finance
Corporate Finance and Governance
article

Language similarity and IPO underpricing

Pu Zhao, Haoyu Wang, Chen Feng
article en

Abstract

In this study, we investigate whether language similarity between auditors and chairpersons mitigates IPO underpricing. We focus on China, a country with a high incidence of IPO underpricing. We define language similarity as the auditor and the chairperson sharing the same dialect. To measure this, we manually collect the identification (ID) numbers of auditors and chairpersons and construct a proxy for language similarity based on the birthplaces identified by their ID numbers. Our findings indicate that auditor-chairperson language similarity helps alleviate IPO underpricing. We also find that IPO companies are more likely to select auditors who share the same language with their chairpersons. Our results remain robust even after controlling for additional control variables and employing matching methods, 2SLS instrumental variables, and alternative measurements. The mechanism through which language similarity reduces IPO underpricing is by compensating for informational gaps in low-readability and high-similarity prospectuses through incremental information production. Furthermore, the effects of language similarity are more pronounced when IPO companies are audited by Big 10 audit firms, followed by greater analyst coverage, and are listed under the registration-based IPO regime. Our research confirms the significant role of language similarity in emerging capital markets.

European Journal of FinanceVol. 31(6)
Australian Regenerative Medicine Institute (AU), Xiamen National Accounting Institute (CN), Monash University (AU), Hebei Finance University (CN)
National Social Science Fund of China
Openalex Percentile: Top 62%
Corporate Finance and Governance
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