Information asymmetry, legal environment, and family firm governance: Evidence from IPO underpricing in China

We study the interactions of information asymmetry, agency problems, and the local legal environment in the governance role of family firms through the lens of IPO underpricing in China. We find that the IPO underpricing of family business is lower than non-family business by a 12% margin after controlling for other factors. Furthermore, the smaller IPO underpricing for family firms is more pronounced for firms in regions with a relatively good legal environment. The mitigating role of family member directorship in reducing IPO underpricing is stronger when the legal environment index increases. The evidence suggests that information asymmetry outweighs the litigation risk in driving the IPO underpricing. The results are consistent with the notion that good legal protection reduces the moral hazard in the transfer of information between market participants, enhances the credibility of information disclosure and reduces the verification cost for outside investors.