Underpricing and Firm’s Distance from Financial Centre: Evidence from three European Countries

Abstract

We provide international evidence on the relationship between the extent of underpricing related to initial public offerings (IPOs) and the distance of the issuing firm from the financial centre of a country: for France, Germany and Italy, the higher the distance, the higher the level of underpricing. Under the maintained assumption that headquarters of institutional investors and underwriters are part of a financial centre, our evidence is consistent with the hypothesis that ex ante uncertainty regarding the value per share of an issuing firm increases with the firm’s physical distance from the underwriter. As financial centres are usually located in the richest areas of the countries concerned, spatial difference in the cost of equity financing may contribute to the persistence or the widening of local disparities.Asymmetric information, Distance, IPO, Underpricing