The impact of institutional quality on initial public offerings

• Country-level institutional quality is positively correlated with IPO underpricing.
• The association is strong in developed markets, but absent for emerging market IPOs.
• Extra-legal institutions impact the relation between institutional quality and underpricing.
• Control considerations drive the institutional quality and underpricing relation.

Country-level institutional quality is positively correlated with the underpricing of initial public offerings (IPOs). The association is strong for IPOs issued in developed markets, but absent for emerging-market IPOs. We hypothesize that extra-legal institutions, including financial reporting practices, law enforcement, public trust, and outside monitoring affect the availability and value of private benefits of control accessible to entrepreneurs, which in turn shapes the relation between institutional quality and IPO underpricing. Evidence on the relation between underpricing and post-IPO ownership dispersion is consistent with prior studies that suggest that underpricing is motivated, at least in part, by entrepreneurs’ desire for post-IPO control.