Law Firms as Reputational Intermediaries and the Effect on US Bound First Offer IPO Underpricing

Abstract

There is information asymmetry between the investment banks that act as underwriters of a first-issue initial public offering (IPO) from outside the U.S. and the subsequent investors. Accordingly, the issued stock can suffer from ‘‘underpricing’’ and fail to maximize potential proceeds of the IPO. The empirical analysis set forth in this paper finds that law firms can act as reputational intermediaries to provide signals of value. Prestigious law firms that represent investment banks are found to reduce underpricing, while the prestige of the law firms representing the issuer can increase underpricing depending on the nation of domicile for the firms.