Internet penetration 2016-1-4 - fmaconferences.org … · Internet Penetration and International...

Internet Penetration and International IPO Underpricing

Thomas J. Boultona,*, Scott B. Smartb, Chad J. Zutterc

aFarmer School of Business, Miami University, Oxford, OH 45056, USA bKelley School of Business, Indiana University, Bloomington, IN 47405, USA

cKatz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA

Draft: September 2015

Abstract

We study the relation between Internet penetration and initial public offering (IPO) underpricing. Examining 9,432 IPOs from 34 countries, we find that IPO offer prices are more precise in countries where more people have access to the Internet. Internet penetration is negatively correlated with initial returns and positively associated with the size of outside blockholdings for at least one year after the IPO. These findings are consistent with the conjecture that Internet access is associated with reduced information asymmetry and, therefore, more efficient IPO outcomes.

JEL classification: G15; G24; G30; G32; G34

Keywords: international finance; Internet penetration; information asymmetry; initial public offerings; underpricing

Research funding was provided by the Lindmor Professorship (Boulton). Any remaining errors or omissions

are the responsibility of the authors.

* Corresponding author. Tel.: + 1-513-529-1563.

E-mail address: [email protected] (T. Boulton).

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I. Introduction

The world has witnessed dramatic changes in the speed of information availability and methods for

consuming information in recent decades. Arguably, the most impactful change in information

consumption is a result of the advent of the Internet, which makes information available almost

instantaneously to an unprecedented number of people around the world. The important role the Internet

plays in information consumption is illustrated by a recent study from the American Press Institute, which

finds that more Americans use a computer to access news stories each week (69 percent) than traditional

sources like radio (65 percent) and print newspapers / magazines (61 percent).1 Widespread use of the

Internet began in the United States and many other developed countries in the mid-1990s. However,

Internet penetration has not been constant across the world through time. According to statistics compiled

by The World Bank that we summarize in Figure 1, Internet penetration (i.e., Internet users per 100

people) grew from 30 percent to 74 percent in the United States from 1998 to 2008. However, Internet

penetration levels remained below 50 percent in many countries as of 2008, including Argentina, Brazil,

China, India, Italy, Portugal, and Thailand.

[Place Figure 1 about here]

Research finds that the Internet has had profound effects on several markets, including life insurance

(Brown and Goolsbee, 2002), automobiles (Zettelmeyer, Morton, and Silva-Risso, 2006), used books

(Ghose, Smith, and Telang, 2006), and airlines (Orlov, 2011). Common takeaways from this literature are

that the Internet reduces the cost of information acquisition, lessens information asymmetry, helps

overcome adverse selection problems, and leads to more competitive markets. For example, Zettelmeyer,

Morton, and Silva-Risso (2006) show that the Internet lowers prices in the retail automobile market by

providing better information to consumers and changing the means of price negotiations. We contribute to

this literature by studying the impact of the Internet on the capital markets, where information asymmetry

and adverse selection inhibit the efficient allocation of resources. Specifically, we leverage cross-country

1 http://www.americanpressinstitute.org/publications/reports/survey-research/how-americans-get-news/

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variation in the rate of Internet penetration to examine the role of information asymmetry in the market

for initial public offerings (IPOs), a capital market transaction characterized by severe information

asymmetry problems.

Information asymmetry is believed to impact the IPO process in many ways, including the precision

of offer prices and the substantial first-day returns exhibited by many new issues. On the issue of offer

price precision, Bradley, Cooney, Jordan, and Singh (2004) find robust evidence that firms are more

likely to set an integer offer price when there is a high degree of uncertainty surrounding firm value.

Several theories suggest that information disparities among IPO participants drive first-day gains,

including information asymmetries between issuers and investment banks (Barron, 1992), issuers and

investors (Welch, 1989), and more- and less-informed investors (Rock, 1986). Ljungqvist (2007) weighs

the evidence in the IPO literature and concludes that information asymmetry has a “first-order effect on

underpricing.” (p. 380) If greater Internet penetration is associated with better information dissemination

and, therefore, less information asymmetry, then we should observe a negative relation between Internet

penetration and both the frequency of integer offer prices and IPO underpricing.

We test our hypothesis using a sample of 9,432 IPOs issued in 34 countries from 1998 to 2008. Our

measure of Internet penetration is from The World Bank, which began reporting the number of Internet

users per 100 people on a country-by-country basis annually in the mid-1990s. Consistent with the idea

that Internet access reduces information asymmetry, we find that firms are less likely to set an integer

offer price in countries with greater Internet penetration. Unconditionally, slightly more than half of our

sample IPOs are priced on an integer (50.4 percent). The results of logistic regressions indicate that a one

standard deviation increase in Internet penetration, which is equivalent to adding over 23 Internet users

per 100 people, is associated with a 2.3-4.6 percent decrease in the likelihood that an IPO firm sets an

integer offer price.

When we consider initial returns, we find a negative association between country-level measures of

Internet penetration and firm-level underpricing. In other words, in countries where more people have

access to information via the Internet, IPO firms tend to experience smaller first day returns. This is

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consistent with prior literature that finds a positive relation between information asymmetry and initial

returns. The effect of Internet penetration on underpricing is both statistically and economically

significant. As a point of reference, the average underpricing for our IPO sample is slightly over 39

percent. Our multivariate results imply that a one standard deviation increase in Internet penetration is

associated with a 16 percentage point decrease in underpricing.

The relation between Internet penetration and underpricing is robust to measuring initial returns over

the first 22 trading days (one calendar month). Measuring returns over the first calendar month

simultaneously controls for daily volatility limits imposed in several sample countries and underwriters’

propensity to engage in price stabilization. When we include country-level trust measures available from

The World Values Survey, we find that the negative relation between Internet penetration and

underpricing is stronger in countries with higher levels of trust. We interpret this result to suggest that

information received online is viewed as more credible in countries with higher levels of trust.

In addition to the relation between Internet penetration and underpricing, we consider the role of

information asymmetry on post-IPO blockholdings. If information asymmetry deters investors from

taking large stakes in IPO firms, we expect to observe a positive relation between Internet penetration and

post-IPO blockholdings. If, on the other hand, information asymmetry motivates larger post-IPO

blockholdings by giving post-IPO investors greater influence over corporate matters, we should observe a

negative relation between Internet penetration and post-IPO blockholdings. Our evidence is consistent

with the former. Specifically, we find that ownership concentration is positively correlated with Internet

penetration at least one year after the IPO. As one might expect, this relation dissipates as time passes

from the initial public offering and information asymmetry is resolved in the market.

Our study contributes to the literature in several ways. First, we provide evidence that Internet

penetration is correlated with capital-market outcomes. This complements prior research that documents

that the Internet has had a positive effect on other markets, including life insurance (Brown and Goolsbee,

2002), automobiles (Zettelmeyer, Morton, and Silva-Risso, 2006), used books (Ghose, Smith, and Telang,

2006), and airlines (Orlov, 201). We show that IPO offer prices are more precise and that initial returns

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tend to be lower in countries where Internet access is more widespread. Our results imply that countries

that invest in Internet availability may experience positive spillover effects in the capital markets, as the

cost of going public decreases for firms seeking to raise equity capital.

Second, we contribute to the literature on the determinants of cross-country variation in IPO

outcomes. Take underpricing, for example, which is observed in all countries and time periods, with

substantial variation in average initial returns around the world (e.g., Loughran, Ritter, and Rydqvist,

1994). Prior studies consider differences in country-level institutional characteristics (Loughran, Ritter,

and Rydqvist, 1994; Boulton, Smart, and Zutter, 2010) and accounting outcomes (Boulton, Smart, and

Zutter, 2011) as partial explanations for this cross-country variation. Our results suggest a more basic

determinant, access to abundant and timely information via the Internet, helps to explain the cross-country

variation in initial returns. We also believe that we are the first to study IPO offer price precision in an

international sample. Our results suggest that, in addition to firm- and event-specific factors, country-level

characteristics have the potential to impact IPO firms’ pricing decisions.

Third, in addition to our main results on the relation between Internet penetration, offer price

precision, and IPO underpricing, we find that Internet penetration is positively correlated with post-IPO

blockholdings. Outside blockholders are believed to have a positive impact on corporate policy (Barclay

and Holderness, 1991; Dennis Serrano, 1996; Bethel, Liebeskind, and Opler, 1998). Our results suggest

that more widespread access to the Internet may lead to greater oversight of management by outside

blockholders. Thus, in addition to a lower cost of going public, greater Internet access appears to play a

positive role in firm-level governance.

The remainder of the paper is organized as follows. We discuss the related literature and develop

hypotheses in Section II. In Section III, we describe our data and empirical strategy. Section IV reports

our empirical results. Section V offers our conclusions.

II. Internet penetration and IPOs

Information asymmetry in initial public offerings

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Prior research suggests that information asymmetry problems exist between IPO firms, financial

intermediaries, and investors (e.g., Barron, 1992; Welch, 1989; Rock, 1986). Several studies report

evidence to suggest that IPO firms take actions to reduce information disparities and improve IPO

outcomes. Avenues considered for reducing information asymmetry include providing more timely and

informative disclosures to investors (Jog and McConomy, 2003; Schrand and Verrecchia, 2005; Leone,

Rock, and Willenborg, 2007) and associating with more reputable financial intermediaries (Beatty and

Ritter, 1986; Carter and Manaster, 1990; Megginson and Weiss, 1991). These, and related studies, tend to

find evidence consistent with the idea that improved disclosures and reputable financial intermediaries

reduce information asymmetry among IPO participants.

Our study extends the analysis to a multi-country setting to determine if country-level Internet

penetration is correlated with information asymmetry and IPO outcomes in different markets. In so doing,

we add to the limited evidence on the determinants of cross-country IPO outcomes and to the literature on

the value of information dissemination in different countries. Given the central role of asymmetric

information in new issues, we anticipate that differences in Internet penetration across countries will

influence the costs that firms going public in different countries face.

Our first hypothesis considers the relation between country-level Internet penetration and the

precision of IPO offer prices. Harris (1991) studies stock price clustering and discreteness and proposes

that traders use discrete prices to simplify and lower the cost of negotiations. Bradley, Cooney, Jordan,

and Singh (2004) extend this line of reasoning to IPO offer prices in the U.S. and find that a significant

portion of firms set an integer offer price. Consistent with the notion that integer offer prices suggest

greater value uncertainty, the authors find a positive relation between integer offer prices and offer price

adjustments, initial returns, and post-IPO return volatility. If Internet penetration reduces uncertainty by

providing superior information for issuers and underwriters, we should expect IPO firms to be less likely

to set an integer offer price in countries with greater Internet penetration. This leads us to our first

hypothesis:

H1: Internet penetration is positively correlated with offer price precision.

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Our second hypothesis studies the relation between country-level Internet penetration and IPO initial

returns. Theory suggests that information disparities among IPO participants drive first-day gains,

including information asymmetries between issuers and investment banks (Barron, 1992), issuers and

investors (Welch, 1989), and more- and less-informed investors (Rock, 1986). For example, Rock (1986)

suggests that underpricing is necessary to induce less-informed investors to participate in the new issues

market, lest they withdraw from the IPO market entirely. Consistent with the notion that better

information is associated with lower underpricing, Schrand and Verrecchia (2005) report lower

underpricing when firms make more frequent pre-IPO disclosures and Leone, Rock, and Willenborg

(2007) find lower underpricing for issuers with more specific “use of proceeds” disclosure. This leads to

our second hypothesis, which predicts a negative relation between Internet penetration and underpricing.

H2: Internet penetration is negatively correlated with initial returns.

Our third hypothesis considers the impact of Internet penetration on post-IPO ownership

concentration, which is not immediately apparent. On the one hand, more information may encourage

greater IPO participation and smaller blockholdings, as investors do not feel compelled to hold large

blocks as a means of securing greater access to information. On the other hand, more information may

encourage investors to take larger positions in firms in which they feel more informed, resulting in larger

post-IPO blockholdings. Thus, our third hypothesis reflects uncertainty with respect to the relation

between Internet penetration and post-IPO blockholdings.

H3: Internet penetration is positively / negatively correlated with post-IPO blockholdings.

In the next section we describe the sample we construct to test our hypotheses. Subsequent sections

provide evidence consistent with the notion that greater Internet penetration is associated with more

efficient IPO outcomes.

III. IPO sample

Sample construction

We begin our sample construction by retrieving all IPOs for all countries reported in the Thomson

Financial SDC Platinum New Issues database from 1998 through 2008. As is custom in the IPO literature,

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we exclude financial firms, rights offerings, unit offerings, closed-end funds, trusts, limited partnerships,

and depository receipts. IPO events are matched with the Datastream database using the SEDOL

identifier common to both databases or by hand where the SEDOL is not available. For each match, we

collect the first-day secondary market price, which we define as the first closing price with positive

trading volume that occurs within –3 to +60 days of the SDC IPO issue date, required to calculate

underpricing. We drop IPOs that do not have a valid “first-day” secondary market closing price in

Datastream and IPOs issued in countries not uniquely covered by The World Bank’s Internet penetration

data.2 To eliminate the impact of outliers, we trim our sample by removing the top and bottom one

percent based on initial returns, which are calculated as the first-day secondary market closing price

divided by the IPO offer price, minus 1. Finally, we exclude countries with fewer than five IPOs during

our sample period, leaving us with a final sample of 9,432 IPOs issued in 34 countries.

Descriptive statistics

In Table 1, we report descriptive statistics for the variables used in our analysis. Mean Internet

penetration across our IPO sample is 44.6, indicating that the typical sample IPO event takes place in a

country where slightly more than 44 out of every 100 people has Internet access at the time of the

offering. The cross-sectional standard deviation of Internet penetration is 23.4 percent, indicating large

variation in access to the Internet across our sample.

[Place Table 1 about here]

Because other sources of information may serve to reduce information asymmetry, we consider

newspaper circulation as an alternative measure. Newspaper circulation data is from the UNESCO

Institute for Statistics, which reports total average circulation per 1,000 inhabitants. Because updated data

on newspaper subscriptions is not available for our entire sample period for many countries, we use the

newspaper circulation statistic reported closest to but not after 1997 for each of our sample countries. As

2 Due to daily volatility limits that may constrain secondary prices, we use the tenth valid price to measure

underpricing for IPOs issued in France and Greece.

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was the case with Internet penetration, there is substantial variation in access to information across our

sample countries based on newspaper circulation. The sample mean is 2.9 newspapers per 1,000

inhabitants, with a range of 0.3 to 15.1. Unlike Internet penetration, which increased in every sample

country during our period of investigation, newspaper circulation was stable or even declined during the

same period in many of our sample countries.

Trust is from The World Values survey, which asks: “Generally speaking, would you say that most

people can be trusted or that you can’t be too careful in dealing with people?” On average, 37.2 percent of

respondents indicate that people can be trusted. However, this measure exhibits substantial variation, with

a range of 2.8 percent to 68.0 percent within our sample. The sample mean initial return equals 39.1

percent. Not evident in Table 1 is the substantial variation in average first day returns across countries

previously documented by Loughran, Ritter, and Rydqvist (1994) and others. We illustrate the cross-

country variation in initial returns and the number of IPOs for our sample in Figure 2. Average first day

returns range from 1.4 percent in Argentina to 120.7 percent in China during our sample period.


Bradley, Cooney, Jordan, and Singh (2004) indicate that IPOs priced on an integer signal greater

value uncertainty and exhibit greater underpricing. We find that slightly more than half of our IPOs have

an integer offer price. We create an indicator variable to identify top-tier underwriters, based on prior

research that finds that underpricing may be influenced by the quality of the underwriter (e.g., Carter and

Manaster, 1990; Megginson and Weiss, 1991). Top tier underwriter is set equal to one for IPOs

underwritten by investment banks listed in the top 25 of SDC’s global league tables for the issue year, and

zero otherwise. Fewer than 25 percent of our IPOs employ a top-tier underwriter.

Price stabilization refers to underwriters’ tendency to provide price support once IPO trading begins.

The incentive to engage in price stabilization is especially true for IPOs that experience a price decline

that threatens to breach the offer price. Price stabilization activity would temporarily inflate secondary

market prices, resulting in larger initial returns. If price stabilization is widespread, then we expect to see

more first-day returns equal to or slightly greater than zero and fewer first-day returns just below zero as

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underwriters participate in post-IPO trading to prevent prices from dropping below the offer price.

Therefore, for each country, we calculate price stabilization, which is the difference in the number of

IPOs with initial returns between zero and one percent and the number of IPOs with initial returns

between zero and negative one percent. We normalize this difference by dividing by the total number of

IPOs in each country. In countries where price stabilization is common, we expect larger values for price

stabilization, and larger underpricing. The sample mean value for price stabilization is 0.01, which

indicates a slight tendency towards stabilization.

“Hot market” effects suggest higher underpricing during periods when IPO volume and overall stock

market returns are high (e.g., Ritter, 1984). To control for these hot market effects, we construct an IPO

activity measure, which equals the number of IPOs in a given country in each year divided by the total

number of listed equities in Datastream for that country in 2008. The sample mean value for IPO activity

is 0.027, which indicates that there are 2.7 IPOs for every 100 publicly listed firms in the issue year of our

average sample IPO. As a second control, we calculate the return on the Datastream market index in the

three months preceding each IPO. We report a mean return of 2.9 percent over the three months leading

up to the typical sample IPO.

To control for differences in liquidity across national markets, we include a stock market turnover

ratio, which is updated annually for each sample country by The World Bank. Ellul and Pagano (2006)

suggest that IPOs in less liquid markets will exhibit larger initial returns, as underpricing, in part,

compensates IPO investors for the illiquidity risk that they bear. The sample mean indicates that the

typical sample country experiences a total value of shares traded equal to 102.2 percent of its average

market capitalization over the calendar year. La Porta et al. (2000) demonstrate a link between investor

protections and capital market outcomes. In the context of IPO markets, Boulton, Smart, and Zutter

(2010) find that IPOs tend to be underpriced more in countries with strong shareholder protections. We

control for country-level governance by including the antidirector rights index from La Porta et al. (1998).

Offer size is included to capture information asymmetries. The intuition for this variable is that larger

IPOs are often sold by firms that are more familiar to investors and tend to generate more discussion in

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the period preceding the offer date. We CPI-adjust the offer size reported by SDC to constant 2008 U.S.

dollars using CPI data from the U.S. Bureau of Labor Statistics website. The average IPO in our sample

raises slightly more than $107 million. Volatility captures the standard deviation of returns over the 30

days following the IPO. Average volatility is 4.9 percent.

We include an indicator variable that identifies bookbuilt offerings, which Sherman (2005) finds is

the prominent method for taking firms public worldwide. Over 65 percent of our sample IPOs are book-

built. In our sample, 54.5 percent of IPOs are firm commitment, which Ritter (1987) finds are underpriced

less than best efforts IPOs. Few IPOs are equity carve-outs (3.6 percent), which Schipper and Smith

(1986) and Prezas, Tarimcilar, and Vasudevan (2000) find are underpriced less than original IPOs. We

also consider the monitoring role of commercial banks, who may substitute for shareholder monitoring,

especially when they can make equity investments. Based on information reported in Barth, Caprio, and

Levine (2006), 41.4 percent of sample IPOs are issued in countries that permit bank ownership of equity.

Based on the classifications of Ljungqvist and Wilhelm (2003), 24.2 percent of IPOs are from a hi tech

industry.

IV. Internet penetration and IPOs

Country-level Internet penetration and IPO offer price precision

Our first hypothesis predicts a positive relation between country-level Internet penetration and the

precision of IPO offer prices. Harris (1991) studies stock price clustering and discreteness and proposes

that traders use discrete prices to simplify and lower the cost of negotiations. Bradley, Cooney, Jordan,

and Singh (2004) extend this line of reasoning to IPO offer prices and find that a significant portion of

firms set an integer offer price. Consistent with the notion that integer offer prices suggest greater

uncertainty, the authors find a positive relation between integer prices and offer price adjustments, initial

returns, and post-IPO return volatility.

In Table 2, we report multivariate analysis that considers the relation between Internet penetration and

the likelihood of observing an integer offer price. Our control variables are inspired by Bradley, Cooney,

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Jordan and Singh (2004), who model the decision to price on an integer as a function of the level of the

final offer price, ex post uncertainty, offer price adjustment, underwriter reputation, and offer size. The

dependent variable in the Table 2 regressions is an indicator variable set equal to one for IPOs priced on

an integer, and zero otherwise. Medium (high) offer price is an indicator variable set equal to one for

IPOs priced at or above the 50th (75th) percentile, within country. Volatility is the standard deviation of

aftermarket return volatility, measured over the first 22 post-IPO trading days. The remaining control

variables are described in conjunction with Table 1. In addition to offer price level, ex post uncertainty,

underwriter reputation, and offer size, we control for recent IPO activity, stock market turnover, and hi

tech firms. Recent IPO activity may provide information to subsequent IPOs that allow for more precise

offer prices. Turnover captures market liquidity, where liquid markets are expected to provide more

immediate feedback and more efficient stock prices to investors. Hi tech is included to capture differences

in uncertainty related to the nature of hi tech firms.


Hypothesis 1 predicts a negative relation between Internet penetration and the likelihood that an IPO

is priced on an integer. Thus, the explanatory variable of interest is Internet penetration and the expected

sign of the coefficient is negative. Consistent with expectations, we find that firms are less likely to set an

integer offer price in countries with greater Internet penetration. The results indicate that a one standard

deviation increase in Internet penetration, which is equivalent to adding over 23 Internet users per 100

people, is associated with a 2.3-4.6 percent decrease in the likelihood of setting an integer offer price.

The control variables are generally consistent with prior literature. Firms that set prices above the

median are more likely to price on an integer compared to IPOs priced below the median. Aftermarket

volatility and underwriter reputation are positively correlated with integer offer prices. Consistent with the

idea that prior IPO activity helps subsequent IPOs set more precise offer prices, recent IPO activity is

negatively correlated with integer offer prices. Contrary to the findings of Bradley, Cooney, Jordan, and

Singh (2004), we find that larger IPOs are more likely to price on an integer. Finally, turnover and hi tech

are both positively associated with integer offer prices.

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The results we report in Table 2 are consistent with the idea that widespread Internet access reduces

information asymmetry in such a way the IPO firms and their intermediaries tend to set more precise offer

prices. In the next section, we consider the relation between Internet penetration and initial returns.

Country-level Internet penetration and IPO underpricing

Our second hypothesis predicts a negative relation between country-level Internet penetration and

firm-level IPO underpricing. Figure 3 reports a simple test of this prediction. We begin by dividing our

IPO sample into terciles based on Internet penetration. Mean internet penetration in the highest tercile is

63.7 (Internet users per 100 people). This compares to 49.3 and 29.2 for the middle and lowest terciles,

respectively. Within each tercile, we calculate average underpricing. Consistent with our prediction, we

find a negative relation between Internet penetration and underpricing. Specifically, average underpricing

is 27.2 (44.9) percent for IPOs in the highest (lowest) tercile of Internet penetration. The difference in

underpricing between the top and bottom terciles is significant at the 1 percent level or better.


Of course, the evidence reported in Figure 3 fails to control for other factors thought to impact

underpricing. We report a more rigorous examination of the relation between Internet penetration and

underpricing in Table 3. We report the results of multivariate models that control for other determinants

of underpricing discussed in relation to Table 1. The dependent variable in each of the models is

underpricing. The primary variable of interest is Internet penetration. All regressions include industry

controls based on the classifications reported in Dyck and Zingales (2004) and issue year indicator

variables. Statistical significance is based on standard errors clustered at the country level (Rogers, 1993).


Model 1 provides support for our hypothesis that predicts a negative relation between country-level

Internet penetration and firm-level underpricing. The coefficient (–0.007) indicates that a one standard

deviation increase in Internet penetration, which is essentially the equivalent of moving from Malaysia to

the United Kingdom based on 2008 Internet penetration figures, is associated with a 16.4 percentage point

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decrease in underpricing. This is an economically significant result, considering that the average

underpricing across our IPO sample is 39.1 percent.

As an alternative to Internet penetration, Model 2 considers the relation between newspaper

circulation and underpricing. Consistent with expectations, the relation between newspaper circulation

and underpricing is negative. However, the coefficient is not significant at standard levels. When we

control for both Internet penetration and newspaper circulation in Model 3, we find results similar to

Models 1 and 2. Specifically, the negative relation between Internet penetration and underpricing is

similar in magnitude to Model 1 and statistically significant, while the relation between newspaper

circulation and underpricing is not statistically significant. Presumably, the amount and timeliness of

information available via the Internet is superior to that offered by newspapers. It is also often the case

that the content in newspapers is available online in conjunction with or even in advance of the actual

newspaper printing.

The control variables are consistent with expectations based on prior research. Consistent with hot

markets effects, underpricing is positively correlated with both prior IPO activity and recent market

returns. Consistent with the notion that larger offers suffer less from information asymmetry, we find a

negative relation between offer size and underpricing. Finally, the negative relation between the bank

ownership indicator and underpricing is consistent with Boulton, Smart, and Zutter (2010), which posits

that bank ownership of equity can have a certification effect resulting in lower underpricing. The R-

square values indicate that our models explain about 16 percent of the variation in the international

underpricing cross-section.

Country-level Internet penetration and post-stabilization returns

In Table 4, we report a slightly different specification to study the relation between Internet

penetration and underpricing. Specifically, we measure initial returns using the stock price at the close of

trading 22 trading days (one calendar month) after the initial public offering. This accounts for two

factors that might impact our results. First, several sample countries impose daily volatility limits that

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may dampen daily price movements for IPO firms (e.g., France, Greece, and Taiwan). After 22 trading

days, the secondary market price should have adjusted fully, even in countries with daily volatility limits.

Second, this approach controls for price stabilization, which consists of post-IPO trading by underwriters

aimed at supporting the secondary market price. Because stabilization activities tend to be short lived, the

impact of price stabilization on IPO returns should diminish over time. As in the prior table, the primary

variable of interest is Internet penetration. The remaining control variables mirror those discussed for

Table 3.


The results reported in Table 4 provide additional support for our main hypothesis. We find a strong,

negative relation between country-level Internet penetration and firm-level IPO returns measured after 22

trading days. The coefficient on the Internet penetration variable reported in Model 1 (–0.008) indicates

that a one standard deviation increase in Internet penetration, is associated with a 18.7 percentage point

decrease in one-month returns, which is slightly larger than the magnitude of the effect when we measure

returns over the first trading day.

The control variables are also consistent with Table 3. One-month returns are positively correlated

with both prior IPO activity and recent market returns, and negatively correlated with offer size. We

continue to find a negative relation between bank ownership of equity and returns. There is also some

evidence that returns are lower for equity carve-outs and higher for hi tech firms. The R-square values

indicate that our models explain about 12 percent of the variation in the international cross-section of

initial returns.

Country-level Internet penetration, trust, and IPO underpricing

The role of Internet penetration in alleviating information asymmetry for IPOs depends, in part, on

whether or not investors trust information received online. In a 2012 Harris Interactive survey, 98 percent

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of respondents expressed a distrust of the Internet.3 We consider the impact of trust on underpricing and

the relation between Internet penetration and IPO underpricing in Table 5. While not the focus of this

analysis, the role that trust plays in explaining country-level variation in underpricing is also novel. Prior

research finds that cultural attributes help explain country-level differences in underpricing (e.g., Costa,

Crawford, and Jakob (2013), but to our knowledge we are the first to directly examine the relation

between country-level trust and firm-level underpricing.


Our trust measure is from The World Values survey, which asks: “Generally speaking, would you say

that most people can be trusted or that you can’t be too careful in dealing with people?” In Model 1, trust

is continuous measure that reflects the percentage of respondents who answered that most people can be

trusted. In subsequent models, we construct indicator variables for above median and above 75th

percentile trust scores (constructed in sample). The dependent variable is underpricing, although the

reported results are quantitatively similar when we measure returns over the first 22 calendar days, as in

Table 4. The primary variables of interest are Internet penetration and trust, and the interaction of the two.

While we have no priors with respect to the relation between trust and underpricing, if information

received online is viewed as more credible in countries with higher trust scores, we expect to find that the

relation between Internet penetration and underpricing is stronger in countries with higher trust.

Alternatively, if less information is required by investors in high trust countries, it might be the case that

Internet penetration is more impactful in low trust countries. If trust is required for online information to

be viewed as credible, we expect to observe a negative coefficient on the interaction term. Alternatively,

if trust reduces the need for additional sources of information (e.g., online), we expect to observe a

positive coefficient on the interaction term.

Consistent with the notion that information received online is viewed as more credible in countries

that have higher levels of trust, we find that the negative relation between Internet penetration and

3 http://newsfeed.time.com/2012/07/23/almost-everyone-doesnt-trust-the-internet/

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underpricing is strongest in countries with higher trust scores. This is the case whether we measure trust

using the continuous measure from The World Values Survey (Model 1) or an indicator variable

identifying countries in the top 25 percent based on trust (Model 3). Interestingly, trust alone is positively

correlated with underpricing.

Country-level Internet penetration and post-IPO ownership concentration

As hypothesis 3 reflects, the anticipated impact of Internet penetration on post-IPO ownership

concentration is uncertain. On the one hand, more information may encourage smaller blockholdings, as

outsiders do not feel compelled to hold large blocks as a means of securing greater access to information.

On the other hand, more information may result in larger blockholdings, as investors are more

comfortable taking larger positions in firms in which they feel more informed.

In Table 6, we empirically examine the relation between Internet penetration and post-IPO

blockholdings. The models are motivated by Boulton, Smart, and Zutter (2010), which finds that

underpricing is positively correlated with post-IPO ownership dispersion. The dependent variable in

Models 1-3 is the log of the ratio of the ownership Herfindahl index to 1 minus the ownership Herfindahl

index. The ownership Herfindahl index is the sum of the squared fractional ownership of the following

groups: government, cross holdings, pension funds, investment companies, employee and family, foreign

holdings, and others. Ownership data is from Datastream. By construction, the ownership Herfindahl

index ranges from 0 to 1, with higher values indicative of a more concentrated post-IPO ownership

structure. As an alternative to the ownership Herfindahl index, we calculate the percentage of shares held

in blocks of 5% or more minus employee and family holdings (outside blockholdings). The dependent

variable in Models 4-6 is the log of the ratio of outside blockholdings to 1 minus the outside

blockholdings.


The control variables include initial return, which Brennan and Franks (1997) and Boulton, Smart,

and Zutter (2010) find is correlated with greater post-IPO ownership dispersion in the U.K. and

17

internationally, respectively. Because the cost of accumulating a large block increases for larger offers,

we control for offer size. Top-tier controls for underwriter reputation, which is correlated with their

network for placing shares in an IPO. Stock market turnover controls for stock market liquidity.

Underdevelopment is from Butler and Fauver (2006), who construct a multidimensional development

index that includes the following five dimensions of development: workforce deployment, health,

education, technological infrastructure, and transportation infrastructure. Indicator variables are set equal

to one for equity carve-out deals and government owned companies. Employee/family ownership is the

percentage of shares held by employee and family members, as reported by Datastream.

The positive coefficient on Internet penetration in Models 1, 2, 4, and 5, suggests that greater Internet

access is associated with a more concentrated post-IPO ownership structure. This is effect persists in the

data at least 1 year after the offering. Not surprisingly, the impact of Internet penetration on post-IPO

concentration dissipates as time elapses. The control variables are generally consistent with prior

literature. Specifically, initial returns are negatively correlated with post-IPO blockholdings, while larger

offers, IPOs underwritten by top-tier underwriters, and equity carve-outs are associated with greater post-

IPO ownership concentration. The results we report in Table 6 suggest that more widespread access to the

Internet may lead to greater oversight of management by outside blockholders. Thus, Internet penetration

is not only correlated with a lower cost of going public, but also may to play a positive role in firm-level

governance.

Conclusion

Prior research finds that the Internet has had a profound impact on markets for life insurance (Brown

and Goolsbee, 2002), automobiles (Zettelmeyer, Morton, and Silva-Risso, 2006), used books (Ghose,

Smith, and Telang, 2006), and airlines (Orlov, 2011). One of the many benefits of the Internet is reduced

information acquisition costs that result in less information asymmetry and fewer adverse selection

problems. Given the important roles that information asymmetry and adverse selection play in the capital

markets, we consider the impact of the Internet on IPO outcomes. Specifically, we study whether cross-

18

country variation in the rate of Internet penetration is related to offer price precision, initial returns, and

post-IPO ownership concentration.

Examining 9,432 IPOs issued in 34 countries from 1998 to 2008, we find that IPO firms tend to set

more precise offer prices and exhibit smaller initial returns in countries where more people have greater

access to information via the Internet. The results are robust to controls for newspaper circulation and

alternative measures of initial returns. This is consistent with the notion that greater Internet penetration is

associated with less information asymmetry among IPO participants. When we introduce country-level

measures of trust, we find that the negative relation between Internet penetration and underpricing is

driven by countries with high levels of trust. In addition, we find that ownership concentration is

positively correlated with Internet penetration at least one year after the IPO. This indicates that the

reduced information asymmetry brought about by greater Internet penetration motivates larger post-IPO

blockholdings.

Despite the widespread adoption of the Internet in most developed nations, access to the Internet is

not as common in many developing countries. For example, as of 2008 approximately one in three people

in Brazil had access to the Internet. Our results suggest that accessibility to the Internet can have a

positive impact on a country’s capital markets by reducing information asymmetry and decreasing the

cost of raising equity capital for companies seeking to go public.

19

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Fig. 1 Internet penetration by country – 1998 and 2008 Countries are reported alphabetically. Bar heights represent the number of internet users per 100 people by country in 1998 and 2008.

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Fig. 2 Number of IPOs and average underpricing by country Countries are reported alphabetically. Bar heights represent the number of IPOs issued in each country from 1998-2008. Line represents average IPO underpricing in each country during the same period.

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Fig. 3 Internet penetration and IPO underpricing Countries are sorted into terciles based on Internet penetration. Bar heights represent the average Internet penetration for the tercile. The line shows the average country-level underpricing by tercile.

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Table 1 – Descriptive statistics

N Average Std Dev Minimum Maximum Internet penetration 9,432 44.599 23.377 0.139 90.000 Newspaper circulation 9,432 2.931 2.378 0.345 15.091 Trust 8,145 0.372 0.101 0.028 0.680 Initial return 9,432 0.391 0.632 –0.360 3.862 Integer offer price 9,432 0.504 0.500 0.000 1.000 Top tier underwriter 9,432 0.247 0.431 0.000 1.000 Price stabilization 9,432 0.010 0.019 –0.074 0.125 IPO activity 9,432 0.027 0.018 0.001 0.092 Recent market return 9,432 0.029 0.109 –0.488 1.132 Stock market turnover 9,432 1.022 0.567 0.077 3.766 Antidirector rights index 9,432 3.806 1.232 0.000 5.000 Offer size 9,432 107.108 536.364 0.100 23844.340 Volatility 9,362 0.049 0.041 0.000 1.571 Bookbuilt 8,849 0.656 0.475 0.000 1.000 Firm commitment 9,356 0.545 0.498 0.000 1.000 Equity carveout 9,360 0.036 0.186 0.000 1.000 Bank ownership permitted 9,432 0.414 0.493 0.000 1.000 Hi tech firm 9,432 0.242 0.428 0.000 1.000

This table presents descriptive statistics for the entire sample of 9,432 IPOs. Internet penetration is the number of internet users per 100 people as reported by The World Bank. Newspaper circulation is total average circulation per 1,000 inhabitants as of 1997, based on data from the UNESCO Institute for Statistics. Trust is the percentage of respondents who answered that most people can be trusted when asked the following (The World Values Survey): “Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people?” Initial return is the first-day secondary market closing price divided by the final offer price, minus one. Integer offer price is an indicator variable set equal to one for IPOs priced on an integer, and zero otherwise. Top-tier underwriter is an indicator variable set to 1 for IPOs underwritten by an investment bank appearing in the top 25 of SDC’s league tables in the issue year, and zero otherwise. Price stabilization is the difference in the number of IPOs with initial returns between zero and one percent and the number of IPOs with initial returns between zero and negative one percent, divided by the total number of IPOs in each country. IPO activity is the ratio of the total number of IPOs in the issue year divided by the number of Datastream listed equities for the country of listing as of 2008. Recent market return is the return on the Datastream index for the country of listing over the three months preceding the offering. Stock market turnover equals the ratio of the total value of shares traded to aggregate market capitalization as reported annually by The World Bank. The antidirector rights index is a measure of the legal protection afforded to corporate shareholders (La Porta, Lopez-de-Silanes, and Shleifer, 1998). Offer size is the inflation-adjusted offer value in millions of U.S. dollars. Volatility is the standard deviation of stock returns measured over the calendar month following the IPO date. Indicator variables are set equal to one for bookbuilt, firm commitment, and equity carve-out deals. Bank ownership is a dummy variable set to one when bank ownership of nonfinancial firms is either unrestricted or permitted and zero if bank ownership is restricted or prohibited as reported in Barth, Caprio, and Levine (2006). Hi tech firm is an indicator variable set equal to one for firms in one of the hi-tech industries identified by Ljungqvist and Wilhelm (2003), and zero otherwise.

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Table 2 – Likelihood of integer offer price

Model 1 Model 2 Model 3 Internet penetration –0.001*** –0.002*** Newspaper circulation 0.022*** 0.025*** Medium offer price 0.131*** 0.132*** 0.138*** High offer price 0.214*** 0.219*** 0.228*** Volatility 1.236*** 1.141*** 1.190*** Top tier underwriter 0.180*** 0.179*** 0.191*** IPO activity –5.905*** –4.545*** –5.387*** Stock market turnover 0.265*** 0.234*** 0.254*** Offer size (log) 0.017*** 0.016*** 0.008** Hi tech firm 0.092*** 0.083*** 0.089***

Pseudo R2 0.286 0.295 0.299 Number of observations 9,350 9,350 9,350

This table presents the marginal effects from logistic regressions examining the determinants of integer offer prices. The dependent variable is an indicator variable set equal to one for IPOs priced on an integer, and zero otherwise. Medium (high) offer price is an indicator variable set equal to one for IPOs priced at or above the 50th (75th) percentile, within country. All other variables are defined in the notes to Table 1. Regressions include issue year indicator variables. Respectively, ***, **, and * denote significance of the coefficient at the 1, 5, and 10 percent level.

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Table 3 – IPO underpricing

Model 1 Model 2 Model 3 Intercept 0.454** 0.592** 0.496** Internet penetration –0.007** –0.007* Newspaper circulation –0.027 –0.016 Top tier underwriter 0.014 –0.028 0.014 Price stabilization 0.798 1.149 1.062 IPO activity 2.012* 1.786 1.800* Recent market return 0.957*** 1.063*** 0.959*** Stock market turnover 0.111 0.032 0.112 Antidirector rights index 0.022 –0.010 0.017 Offer size (log) –0.037* –0.012 –0.034* Integer offer price 0.027 0.008 0.037 Bookbuilt –0.122 –0.147 –0.117 Firm commitment –0.010 0.001 –0.013 Equity carveout –0.015 –0.058 –0.019 Bank ownership permitted –0.298** –0.313** –0.284** Hi tech firm 0.111* 0.065 0.109

R2 0.163 0.140 0.165 Number of observations 8,769 8,769 8,769

This table presents OLS regressions of IPO underpricing on country-level Internet penetration. The dependent variable is the IPO underpricing calculated as the secondary market closing price divided by the final offer price, minus one. All other variables are defined in the notes to Table 1. Regressions include industry indicators based on the industry classifications reported by Dyck and Zingales (2004) and issue year indicator variables. Respectively, ***, **, and * denote significance of the coefficient at the 1, 5, and 10 percent level based on standard errors clustered at the country level (Rogers, 1993).

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Table 4 – IPO returns (one-calendar month)

Model 1 Model 2 Model 3 Intercept 0.413** 0.547** 0.438** Internet penetration –0.008** –0.008** Newspaper circulation –0.023 –0.010 Top tier underwriter 0.092 0.045 0.093 IPO activity 1.606 1.403 1.436 Recent market return 1.074*** 1.191*** 1.075*** Stock market turnover 0.111 0.022 0.113 Antidirector rights index 0.045** 0.011 0.043* Offer size (log) –0.046** –0.019 –0.043** Integer offer price 0.068 0.042 0.076 Bookbuilt –0.099 –0.127 –0.094 Firm commitment –0.070 –0.054 –0.072 Equity carveout –0.018 –0.065* –0.021 Bank ownership permitted –0.286** –0.307** –0.275** Hi tech firm 0.140* 0.088 0.138*


This table presents OLS regressions of IPO underpricing on country-level Internet penetration. The dependent variable is the IPO return calculated as the secondary market closing price after 22 trading days divided by the final offer price, minus one. All other variables are defined in the notes to Table 1. Regressions include industry indicators based on the industry classifications reported by Dyck and Zingales (2004) and issue year indicator variables. Respectively, ***, **, and * denote significance of the coefficient at the 1, 5, and 10 percent level based on standard errors clustered at the country level (Rogers, 1993).

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Table 5 – Trust

Continuous

Measure Above median

indicator Above 75th percentile

indicator Intercept –0.552** 0.151 0.308* Internet penetration 0.006** –0.006** –0.004** Trust 2.498*** 0.400* 0.616*** Internet penetration × Trust –0.038*** –0.004 –0.009*** Top tier underwriter 0.049 0.026 0.045 Price stabilization –1.099 –1.008 –0.195 IPO activity 1.560 2.267* 1.901* Recent market return 0.915*** 0.961*** 0.930*** Stock market turnover 0.107* 0.155** 0.110** Antidirector rights index 0.027 0.048* 0.013 Offer size (log) –0.060*** –0.048*** –0.059*** Integer offer price 0.098 0.053 0.092 Bookbuilt –0.035 –0.077 –0.039 Firm commitment –0.022 –0.040 –0.017 Equity carveout 0.011 –0.006 0.008 Bank ownership permitted –0.171*** –0.247*** –0.178* Hi tech firm 0.157** 0.152** 0.143**


This table presents OLS regressions of IPO underpricing on country-level Internet penetration and country-level measures of trust. The measures of trust are based on the World Values Survey, which asks: “Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people?” Trust is defined in the first model as the percentage of respondents who answered that most people can be trusted. The second and third models use indicator variables for above median and above 75th percentile trust scores (in sample), respectively. The dependent variable is the IPO underpricing calculated as the secondary market closing price divided by the final offer price, minus one. All other variables are defined in the notes to Table 1. Regressions include industry indicators based on the industry classifications reported by Dyck and Zingales (2004) and issue year indicator variables. Respectively, ***, **, and * denote significance of the coefficient at the 1, 5, and 10 percent level based on standard errors clustered at the country level (Rogers, 1993).

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Table 6 – Post-IPO ownership concentration

Ownership Herfindahl Outside blockholdings 6 months 1 year 2 years 6 months 1 year 2 years Intercept –8.227*** –7.187*** –4.556** –7.114*** –6.097** –3.104 Internet penetration 0.060** 0.047* 0.035 0.062** 0.043* 0.029 Initial return –0.254* –0.176 –0.140 0.009 0.017 –0.246** Offer size (log) –0.092 0.134* 0.299*** –0.025 0.264** 0.421*** Top tier underwriter 0.525* 0.798** 0.758** 0.982*** 0.972*** 0.960** Stock market turnover –0.097 0.025 –0.438 –0.055 0.097 –0.453 Underdevelopment index 0.853 –0.822 –3.098 –2.962 –4.481 –7.446 Equity carveout 1.306** 1.351** 1.256** 0.999* 1.204* 1.270** Government –0.555 –0.326 –0.502 –0.287 –0.222 –0.169 Employee/family ownership 8.270*** 8.131*** 7.726*** –3.618*** –3.636*** –4.040***

R2 0.361 0.334 0.344 0.152 0.171 0.199 Number of observations 2,931 3,985 5,421 2,931 3,985 5,418

This table presents OLS regressions of post-IPO ownership on initial returns. The dependent variable in the first three regressions is the log of the ratio of the ownership Herfindahl index to 1 minus the ownership Herfindahl index. The ownership Herfindahl index is the sum of the squared fractional ownership of government, cross holdings, pension funds, investment companies, employee and family, foreign holdings, and others, as reported by Datastream. The dependent variable in the last three regressions is the log of the ratio of outside blockholdings to 1 minus the outside blockholdings. Outside blockholdings is the percentage of shares held in blocks of 5% or more minus employee and family holdings, as reported by Datastream. Each measure is calculated 6 months, 1 year, and 2 years after the IPO issue date. Internet penetration is the number of internet users per 100 people, as reported by The World Bank. Initial return is measured as the secondary market closing price divided by the final offer price, minus one. Offer size is the natural log of the CPI-adjusted offer value in millions of U.S. dollars. Top-tier is an indicator variable set to 1 for IPOs underwritten by an investment bank appearing in the top 25 of SDC’s league tables in the issue year, and zero otherwise. Stock market turnover is reported annually by The World Bank. Underdevelopment is a multidimensional development index from Butler and Fauver (2006) that includes the following five dimensions of development: workforce deployment, health, education, technological infrastructure, and transportation infrastructure. Indicator variables are set equal to one for equity carve-out deals and government owned companies. Employee/family ownership is the percentage of shares held by employee and family members, as reported by Datastream. Regressions include IPO year and industry dummies. Industry classifications reflect those reported by Dyck and Zingales (2004). Respectively, ***, **, and * denote significance of the coefficient at the 1, 5, and 10 percent level.

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