1. Does culture influence IPO underpricing?
Reference
Does culture influence IPO underpricing?
—— 陈恺妮 ——

2. CONTENTS 1 Abstract 2 Introduction 3 Hypotheses 4 Data and methodology5
Results 6
Conclusions

3. Abstract
This paper examines how cultural differences influence the acceptance of and the expectations for IPO underpricing across 39 countries. It shows：
High power distance and high long term orientation are significantly associated with higher IPO underpricing.
Underpricing is significantly lower in countries characterized by high uncertainty avoidance.

4. Hofstede’s six different dimensions of culture
Introduction——IPO underpricing and culture
Literature review：
Underpricing exists in virtually every global financial market and varies widely across countries from an average of 4% in Russia to an average well over 150% in China.——Loughran et al.,(2011)
How to measure the cross-sectional differences in culture？This paper uses Hofstede’s six cultural dimensions.——Hofstede’s (1980)
Culture do impacts capital market a lot in various ways——Kwok and Tadesse (2006); Aggarwal and Goodell (2009); Fidrmuc and Jacob (2010); Ramírez and Tadesse (2009); Chui et al. (2010)
（Investment choices; Dividend payout ratios; firm cash holdings; investment returns on momentum strategies.）
Hofstede’s six different dimensions of culture
Power distance index
uncertainty avoidance index
individualism
masculinity
long term orientation
indulgence versus restraint
This paper examines if culture potentially influences IPO underpricing is a logical extension to this research stream。

5. Hypotheses
Hypothesis 1：IPO underpricing is positively related to power distance (PDI).
Hypothesis 2：IPO underpricing is negatively related to Uncertainty Avoidance (UAI).
Hypothesis 3： IPO underpricing is negatively related to Individualism (IDV)
Hypothesis 4：IPO underpricing is positively related to Masculinity (MAS).
Hypothesis 5： IPO underpricing is positively related to Long Term Orientation (LTO).
Hypothesis 6： IPO underpricing is negatively related to IVR.

6. Hypotheses
Hypothesis 1：IPO underpricing is positively related to power distance (PDI).
Power distance index (PDI)：It means unequal. According to Hofstede, “Power Distance (PDI) is the extent to which the less powerful members of organizations and institutions accept and expect that power is distributed unequally.”
This paper conjectures that IPO underpricing generally benefits the wealthiest individuals with the most power in a particular country. Cultures with higher levels of PDI are generally more accepting of these levels of inequality. Therefore, the level of IPO might be positively related to the PDI measure for a particular society.

7. Hypotheses
Hypothesis 2：IPO underpricing is negatively related to Uncertainty Avoidance (UAI).
Uncertainty avoidance (UAI)：It deals with a society’s tolerance for uncertainty and ambiguity. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures. The opposite type, uncertainty accepting cultures, usually try to have as few rules as possible.
This paper conjectures that in a cultures characterized by low uncertainty (high UAI), firms would be less likely to underprice and investors would expect an unambiguous price to be established before the opening day of trading of an IPO.

8. Hypotheses
Hypothesis 3：IPO underpricing is negatively related to Individualism (IDV).
Individualism (IDV)：It is the degree to which individuals are integrated into groups. On the individualist side, everyone is expected to look after her/himself and her/his immediate family. The ties in societies between individuals are loose. On the collectivist side, people are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty.”
It is well known that IPO shares are often allocated to the most important clients in exchange for their loyalty to the firm. In more group oriented societies the IPO underpricing is used as a reward for the clients’ loyalty.

9. Hypotheses
Hypothesis 4：IPO underpricing is positively related to Masculinity (MAS).
Masculinity (MAS)：It refers to the distribution of emotional roles between the genders. The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are more assertive and more competitive, but not as much as the men, so that these countries show a gap between men’s values and women’s values.”
This paper conjectures that the greater the degree of masculinity within a society, the greater the competitive nature of the parties involved and the more willing a person or group would be to take advantage of others.

10. Hypotheses
Hypothesis 5：IPO underpricing is positively related to Long Term Orientation (LTO).
Long-Term Orientation (LTO)：Long- term oriented societies foster pragmatic virtues oriented towards future rewards, in particular saving, persistence, and adapting to changing circumstances
As for firm: If firm management has a long term orientation, its main focus during the IPO process is raising capital for the long term benefit of the company. Management, therefore, will more likely accept higher levels of underpricing as long as the company can raise the funds necessary to help meet its long term goals.
As for investor: Investors who obtain shares prior to the IPO secondary market trading date with a long term orientation will not be interested in flipping their shares for short term gains.

11. Hypotheses Hypothesis 6：IPO underpricing is negatively related to IVR.
Indulgence versus Restraint (IVR)：Indulgence stands for a society that allows relatively free gratification of basic and natural human drives related to enjoying life and having fun. Restraint stands for a society that suppresses gratification of needs and regulates it by means of strict social norms.
high IVR indicates a society is especially tolerant to individuals’ desires to enjoy themselves, and spend money. The more likely a society is to indulge, the quicker IPO investors will willingly sell their shares in the open market to capture profits.

12. Data and methodology
The data for our study are acquired from several sources:
The cultural dimensions data——Geert and Gert Jan Hofstede（
IPO return data——Jay Ritter’s IPO Data webpage (
The legal, market based and corporate governance data——Andrei Schleifer’s Data webpage (

13. Data and methodology The simple:
This paper combines Hofstede’s cultural dimensions with Ritter’s IPO return data, then add corporate governance and market based factors our final sample size includes data from 39 countries.
The methodology:
Weighted least squares multi-factor regression models

14. Results Firstly, descriptive statistics
Table 1 presents the average initial returns

15. Results
Table 2 provides summary statistics for all cultural variables.

16. Results
Secondly, Weighted least squares multi-factor regression models
Table 3 contains the full regression results. The model is significant at better than the 1% level with an adjusted R2 of 38.0%.
——the overall model does a good job in predicting the magnitude of IPO underpricing from country to country.

17. Results The coefficient for PDI is positive.
The coefficient for UAI is negative.
The coefficient for IDV is negative.
The coefficient for MAS is positive.
The coefficient for LTO is positive.
The coefficient for IVR is negative ——all consistent with our hypothesis

18. Results
Thirdly, using correlation matrix to find out which factors that are correlated to one another in order to improve the efficacy of the model by eliminating one or more independent variables, so that we can figure out which of Hofstede’s cultural dimensions are important explanatory variables for IPO underpricing.
Table 4 presents the correlation matrix of the six cultural dimensions.

19. Results
To achieve our purpose, we use the backward step-wise regression approach the process starts with all six cultural dimensions and eliminates the dimension with the least significance from the model.
Our final model contains three cultural dimensions: PDI, UAI, and LTO.
UAI is significant at the 5% level, and PDI and LTO are significant at better than the 1% level. Relative to the original regression with all six cultural dimensions the F-test, or the measure of the model’s significance, increases from to Also, the adjusted R2 of the model increases to 39.2%

20. Results All three signs are
consistent with our original cultural dimension hypotheses
UAI is significant at the 5% level, and PDI and LTO are significant at better than the 1% level. Relative to the original regression with all six cultural dimensions the F-test, or the measure of the model’s significance, increases from to Also, the adjusted R2 of the model increases to 39.2%

21. Results
To achieve our purpose, we use the backward step-wise regression approach the process starts with all six cultural dimensions and eliminates the dimension with the least significance from the model.
Our final model contains three cultural dimensions: PDI, UAI, and LTO.
UAI is significant at the 5% level, and PDI and LTO are significant at better than the 1% level. Relative to the original regression with all six cultural dimensions the F-test, or the measure of the model’s significance, increases from to Also, the adjusted R2 of the model increases to 39.2%

22. Results
Additional concern: culture may be simply capturing effects associated with other common variables that have been previously identified to explain IPO underpricing. So this paper finally performs additional tests with the three cultural variables along with legal, market based and corporate governance factors.
Table 6 reports results from six additional models along with the results of the three factor cultural model.
UAI is significant at the 5% level, and PDI and LTO are significant at better than the 1% level. Relative to the original regression with all six cultural dimensions the F-test, or the measure of the model’s significance, increases from to Also, the adjusted R2 of the model increases to 39.2%

23. Results
Model 1 we add a dummy variable for the legal origin of the country.
This legal variable is insignificant, and with the addition of the legal variable the model’s explanatory power is lowered.
The legal origin does not add any explanatory value when the three cultural variables are in the model.
The model uses a dummy variable for an English based legal system. Then change into French and German based legal systems.

24. Results
In Model 2 we add the anti-self dealing index to our three factor model.
The factor is insignificant.
In Model 3 we add the anti-director rights index. The anti-director rights index is significant at the 5% level, and the three cultural variables have the same sign and are all significant at better than the 1% level.
The model uses a dummy variable for an English based legal system. Then change into French and German based legal systems.

25. Results
In Models 4 and 5 we add market based variables to the regression analyses.
Model 4——stock market capitalization as a percentage of country GDP
Model 5——number of listed firms per million population
Both of these variables are significant at the 1% level, and in both models all three cultural variables have the same sign and remain significant at the 1% level.
The model uses a dummy variable for an English based legal system. Then change into French and German based legal systems.

26. Results
Models 6 again use the backward step-wise regression approach starts with the three cultural dimensions PDI, UAI, and LTO along with the significant corporate governance and market variables (anti-director rights, Stock Market Cap/GDP and Listed Firms/million population).
Our final model contains all three cultural dimensions: PDI, UAI, and LTO that are significant at better than the 1% level. The model also includes one significant corporate governance metric (anti-director rights) and one market based metric (Stock Market Cap/GDP).
The model is highly significant
with an F-test value of , and the adjusted R2 of the model increases to its highest level of any of our tests at 56.5%.

27. Conclusions
In this paper, we examine whether Hofstede’s six cultural dimensions influence the level of initial IPO returns from one country to the next. The answer is yes.
In our final three-factor model, we report significant relations between initial IPO underpricing and three of the cultural dimensions: PDI, UAI and LTO. This three-factor model explains nearly 40% of global variation in IPO underpricing using only three cultural variables.
Along with corporate governance and market based variables, the cultural variables help to explain the level of return associated with this critical step, an IPO, in the international capital market system.

28. Thank you !