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Legal Perception and Finance: The Case of IPO Firm Value

Author

Listed:
  • Gerhard Schnyder
  • Anna Grosman
  • Kun Fu
  • Mathias Siems
  • Ruth V. Aguilera
Abstract
In this paper, we contribute to the literature on institutional determinants of IPO valuation. We introduce the concept of ‘legal signaling,’ which focuses on the perception of the quality of law and thus complements the existing institutional approaches to IPO valuation which consider the quality of the positive law (‘standard view’) and firm-level corporate governance practices (‘firm signaling view’). Our approach explicitly models the difference between the effect of the positive law and the effect of the perception of law on IPO value. Based on a worldwide longitudinal dataset of IPO performance across a large number of countries, we find strong support for the claim that the perception of the quality of law is more important than its actual quality to explain post-IPO firm value. This effect holds regardless of whether the law’s quality is correctly perceived or misperceived. Overall, our findings underscore the need for a more sophisticated theorization of the ways in which law affects entrepreneurial finance.

Suggested Citation

  • Gerhard Schnyder & Anna Grosman & Kun Fu & Mathias Siems & Ruth V. Aguilera, 2021. "Legal Perception and Finance: The Case of IPO Firm Value," Working Papers wp532, Centre for Business Research, University of Cambridge.
    • Handle: RePEc:cbr:cbrwps:wp532
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    File URL: https://www.jbs.cam.ac.uk/wp-content/uploads/2023/05/cbrwp532.pdf
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    More about this item

    Keywords

    law and finance; entrepreneurial finance; Initial Public Offerings;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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