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Pacific-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin
Information asymmetry, legal environment, and family firm

governance: Evidence from IPO underpricing in China☆
Wei Huanga,c, Jinxian Lib,⁎, Qiang Zhangb
a
Shidler College of Business, University of Hawaii at Manoa, 2404 Maile Way, Honolulu, HI 96822, USA
b
Hunan University, 2 Lushan South Road, Hunan Province, Changsha 410082, China
c
Center for Economics, Finance, and Management Studies (CEFMS), Hunan University, Changsha, China
ARTICLEINFO ABSTRACT
Keywords: We study the interactions of information asymmetry, agency problems, and the local legal en-
Family business vironment in the governance role of family firms through the lens of IPO underpricing in China.
Information asymmetry We find that the IPO underpricing of family business is lower than non-family business by a 12%
Agency problems margin after controlling for other factors. Furthermore, the smaller IPO underpricing for family
Legal environment firms is more pronounced for firms in regions with a relatively good legal environment. The
IPO underpricing
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.
1. Introduction
Family firms have been a cornerstone of the economy in creating wealth and employment. 1 As a result, family ownership and
control has been a prominent issue in corporate finance research. Literature has highlighted both bright and dark-side of family
ownership. The bright-side view stresses the benefit of family ownership in providing access to finance via other firms under its
control and in their long-term orientation, while the dark-side view states the adverse agency problems when family controlling
shareholders make survival-oriented actions to preserve family's control benefits at the expense of minority shareholders.
Although a large strand of literature has focused on aspects related to firm valuations and the comparison of long-term perfor-
mance between family businesses and non-family businesses, relatively scarce in the literature is the understanding of the mechanism
through which family firms' bright-side and dark-side effect counteract. Especially there is less attention on the performance of family
businesses in a primary market. In this paper, we study how the interactions of agency problems, information asymmetry, and local
legal environment can play out in the governance role of family firms through the lens of IPO underpricing of family firms versus non-
☆
We thank three anonymous referees, Ron Masulis (the editor), Xiaolu Hu, Jun Jiang, David Reeb, Ghon Rhee, and conference participants at
2017 Frontiers of Business Research in China International Symposium at Renmin University, Beijing and 2017 Vietnam International Conference in
Finance (Hanoi), for their valuable comments and suggestions. We are grateful to Ying Huang for her research assistance.
⁎
Corresponding author.
E-mail addresses: weih@hawaii.edu (W. Huang), jinxianl@hnu.edu.cn (J. Li), qiangz@hnu.edu.cn (Q. Zhang).
1
For example, Anderson and Reeb (2003) document that families are present in one-third of the S&P 500 and account for 18% of outstanding
equity.
https://doi.org/10.1016/j.pacfin.2019.01.005
Received 16 October 2017; Received in revised form 4 November 2018; Accepted 21 January 2019
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family firms in China.

Since China implemented its reform and opening up policy, the country's private sector has gradually become the main driving
force of its economic growth (Allen et al. 2005). Within the private sector, the role of family businesses has played an increasingly
important role in the Chinese economy. The Asian Family Business Report 2011, issued by Credit Suisse, pointed out that the number of
Asian family businesses had increased by siX times, with an average annual rate of increase of 21.3% from 2000 to 2011. Neubauer
and Lank (1998) suggest that the contribution of family businesses to the global GDP would reach 45% to 70%. A similar situation has
occurred in China in recent years. Under pressure to further their own development, family business owners have gradually realized
the necessity of publicly raising funds from the stock market. As of 31 July 2014, there were a total of 2528 A-Shares listed com-
panies, of which 747 were family businesses.2
The data from China offers a unique advantage in understanding how the legal environment can interact with agency problems
under asymmetric information in financial markets. Although China has a unified legal regime, there is a large variation in the legal
protection of investors and law enforcement across different provinces. EXisting studies (e.g., Demirguc-Kunt and Maksimovic (1998),
La Porta et al. (1977, 2002), Durnev and Kim (2005),) show the relation between investor protection and firm policy using inter-
national data. Unlike previous cross-country studies that are often criticized for failing to control for unobservable country-specific
characteristics (e.g., culture), we analyze the effects within China. We exploit a dataset that covers a different regional legal en-
vironment index within China and examine the variation in the degree of IPO underpricing for privately-owned listed companies that
include only family and non-family firms.
Our main findings are as follows. First, the IPO underpricing for family businesses is smaller than that of non-family businesses.
On average, the underpricing of family businesses is lower than non-family businesses by about 9% margin, controlling for other
factors. This result supports the view that entrepreneurs' willingness to invest in their own project serves as a positive signal to the
lending market about the quality of the project (e.g., Lyland and Pyle, 1977). This, in turn, reduces the information asymmetry
between investors and family firms that issue IPOs. As a result, those family firms are able to issue equities at a smaller discount. The
results are consistent with the information asymmetry hypothesis of IPO underpricing (e.g., Rock 1986; Beatty and Ritter 1986).
Second, IPO underpricing is significantly lower for family firms with family-member CEO. This is possibly because external
investors perceive greater information asymmetry as well as agency problems for family firms with outside CEOs, and hence demand
higher discounts for those firms' IPOs to compensate for the additional risk this uncertainty creates. However, empirical results also
suggest that the positive effect of a non-family CEO on IPO underpricing can be mitigated by the increase in the percentage of family
directors.
Third, evidence shows that local Legal Environment Index is significantly negatively correlated with the IPO underpricing. A sub-
sample analysis shows that the lower IPO underpricing for family firms is only significant in regions with a relatively good legal
environment. Furthermore, the results from interaction terms in regressions also suggest that the mitigating role of percentage of
family member directorship in reducing IPO underpricing is stronger when the legal environment index increases. The evidence does
not seem to be consistent with the litigation risk hypothesis for IPO underpricing with the U.S. data (Lowry and Shu, 2002), because if
good legal environment means greater litigation risk, IPO underpricing should be greater in relatively good legal environment region
for insurance purpose. Thus, the evidence suggests that in emerging markets such as China, better legal protection could reduce the
dark-side of agency problems and good legal environment could be conducive to more trustworthy information disclosure en-
vironment, leading to smaller family firm IPO underpricing under the information asymmetry hypothesis. In the eyes of investors,
legal environment is positively correlated with the credibility of firms' information disclosure. It is less costly for investors to
verify information disclosed from firms in better legal environment and therefore the discount in IPO pricing demanded by
investors is less.
We conduct robustness check using the propensity score matching (PSM) method. Based on the PSM, we generate a control
sample from non-family firms that can be compared with the treatment group - the family firms. The comparisons with both the
regression approach and the average treatment effect show that family firms have significantly lower IPO underpricing than the non-
family firms.
Our study contributes to the literature in family firms. Prior studies about family businesses mainly focus on the comparison of
long-term performance between family businesses and non-family businesses, and there is less attention on the performance of family
businesses in a primary market. Overall, our results suggest that family firms in China, particularly those with family member CEOs,
are perceived to have fewer agency problems, and therefore under the information asymmetry, they can issue IPOs with significantly
lower discount than non-family firms.
In addition to family firm literature, our study also contributes to the IPO underpricing literature. In China, the underpricing has
been severe, averaging 137.4% from 1990 to 2010. This data compares with 16.3% in Britain from 1959 to 2009. 3 Although IPO
underpricing is a global phenomenon (Loughran et al. 1994), no theories or factors can completely explain the reasons for the
underpricing. Past studies proposed three explanations for IPO underpricing including information asymmetry, signaling, and liti-
gation risk. Evidence from China supports the information asymmetry theory.
Our study contributes to the emerging literature about the effects of legal institutions on finance. Through the lens of IPO
underpricing, we can compare and contrast how the informational environment of family versus non-family firms varies with the
level of legal protection. Our study shows that because of variations in the local legal quality within one country under the same
2
Chinese Modern Family Business Investigation Report, Forbes (Chinese version), September of 2014.
3
Steven D. Solomon, Why IPOs gets underpriced? The New York Times, May 27, 2011.
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legal regime, an improvement in the local legal environment can help firms reduce information asymmetry and mitigate agency
problems.
The paper is organized as follows. In Section 2, we review the literature and propose our hypotheses. In Section 3, we discuss the
research design that includes the data and variable constructions. In Section 4, we provide the main empirical findings. In Section 5,
we provide robustness check. We conclude in Section 6.
2. Literature review and hypothesis development
EXisting literature has shown that information asymmetry between issuing firms and investors is a key factor influencing IPO
underpricing (Ljungqvist 2007). Rock (1986) and Beatty and Ritter (1986) argued that under information asymmetry, issuing
companies or investment banks may use IPO underpricing as a discount to encourage uninformed investors to participate in the IPO
investment. Following their studies, Benveniste and Spindt (1989), Chemmanur (1993) and Sherman (1992) provided either theo-
retical or empirical support for such an explanation. In a financial market where information asymmetry persists, family ownership
can have a special signaling effect. In their pioneering work in signaling model, Leland and Pyle (1977) maintain that entrepreneurs
have inside information about their own project for which they seek financing, and their willingness to invest in their own project can
serve as a signal to the lending market of the true quality of the project. Under this signaling effect, family firms do not need to use
deep discount in the form of IPO underpricing to attract outside investors. Family firms, especially those with family members
managing their operations, are more likely to transmit information about a reduced agency problem and greater incentives to pursue
a continuous improvement of the enterprise's value. This transmission of information would then help to lower the company's IPO
underpricing. In light of the above logic, we propose the following hypothesis.
H1a. If entrepreneurs' willingness to invest in their own project can serve as a positive signal to the lending market of the true quality
of the project, family firms should have less IPO underpricing than non-family firms under the information asymmetry theory.
However, there can be a miXed prediction on family firm IPO underpricing as opposed to non-family firm IPO. Prior studies have
also proposed signaling and litigation risk as other reasons for IPO underpricing. Some researchers argued that the underpricing were
in fact intended as a signal to investors about the quality of firms under IPO. Ritter (1984) provided empirical evidence that un-
derpricing can signal favorable prospects for the firm. Allen and Faulhaber (1989) developed a model for IPO underpricing, in which,
they assumed that a firm itself had the best knowledge of its prospects. Under certain circumstances, firms with the most favorable
prospects find it optimal to signal their type by underpricing their initial issue of shares, because investors would know that only the
best can regain the cost of this signal from subsequent issues. Bad companies would not be able to use large underpricing strategy as
they could not afford to recoup the initial loss from the underpricing. Grinblatt and Hwang (1989) and Welch (1989) offered similar
explanations that IPO underpricing was a credible signal of a company's quality. Therefore, if controlling shareholders in a family
firm have insider information about their project, following the conventional signaling hypothesis, they may use underpricing as a
signal to outside investors about the quality of its project. In this case, family firms' IPO underpricing should be greater than non-
family firms. We, therefore, propose the following competing hypothesis.
H1b. If IPO underpricing serves as a credible signal of a company's quality, family firms should have greater IPO underpricing than
non-family firms under the optimal signaling theory.
In addition to information asymmetry and signaling effects of family firms, there exist significant differences in internal mon-
itoring and agency cost between family and non-family firms, which may lead to differences in IPO underpricing. There are two
paradigms of principal-agent relationship: the conflict between shareholders and the managers and the conflict of interest between
the large and small shareholders (Shleifer and Vishny, 1997). Burkart et al. (2003) show that in theory the degree of legal protection
of minority shareholders determines whether the founder should sell off the firm in the stock market and hire professional managers
and whether family members should stay on as large shareholders to monitor managers.
The prediction of agency cost and internal monitoring on IPO underpricing of family firms can be mi Xed. The bright-side view of
family ownership stresses the benefit of family ownership in providing access to more financing channels through other firms under
its control and in family owners' long-term orientation. The bright-side view also suggests that the family should be able to incubate
firms longer before taking them public so it would predict less underpricing for family firm IPOs. Anderson and Reeb (2003) argue
that having a family member act as a manager holds a distinguishing advantage. Family members tend to communicate regularly
with each other, thereby having natural advantage of supervising the family-member CEO that other companies would not have
(Fama and Jensen 1983). Due to a higher consistency of interests between family members, the agency cost between the principal
(family owner) and agent (family CEO) should be very low (La Porta et al.,1998). In family firms, particularly when the CEO is a
family member, low shareholder-manager conflicts and active monitoring by controlling owners should enhance firm value through
better governance and thus lower IPO underpricing for family firms. However, if non-family members serve as CEOs in family firms,
agency cost could increase; there is an increased uncertainty to the investors due to a weaker control the family owners have over the
management. This could in turn increase IPO underpricing.
The dark-side view of family ownership, on the other hand, states the agency problems may lead the family controlling share-
holders to take short-term oriented actions for the purpose of preserving family's control benefits at the expense of minority
shareholders. Empirical evidence in prior studies are miXed. Villalonga and Amit (2006), for example, found the evidence consistent
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with both the bright-side and dark-side view. Lins et al. (2013) document that family firms cut investment more relative to other firms
during financial crisis, and these investment cut led to greater underperformance. The dark-side view therefore implies that the
family firms have exacerbated agency problems and should offer greater underpricing to investors as a discount. The bright- and
dark-side effect should counter each other and the actual IPO underpricing depends on the relative strength of the two effects. We
thus propose the following competing hypotheses.
H2a. Bright-side view of family firms would imply a lower IPO underpricing of family firms because of low shareholder-manager
conflicts and active monitoring by controlling owners.
H2b. Dark-side view of family firms would imply a greater IPO underpricing of family firms due to controlling family's pursuant of
short-term oriented actions for the purpose of preserving family's control benefits at the expense of minority shareholders.
H2c. IPO underpricing for family firms with family-member CEOs are smaller than family firms with non-family member CEOs.
As the core of corporate governance, the Board of Directors represents the interests of shareholders and has the dual functions of
supervision and decision making. In particular, given that they represent the interest of the controlling family, family directors have a
strong motivation to supervise non-family-member senior managers. If family directors occupy a greater number of positions of the
Board, they will, arguably, be more engaged in supervisory obligations and lower the agency cost to protect the interests of the
shareholders.
Given the above analysis, we posit that the increased proportion of family directors on the Board of a family business can more
effectively realize the Board's functions of decision making and supervision, to improve the business' operating performance and
reduce uncertainties in the corporation's value. Furthermore, in cases where CEOs are not family members, family directors have a
stronger motivation to supervise them, thereby reducing the potentially negative impact on the corporation's performance. Therefore,
we propose the following hypothesis.
H2d. The extent of IPO underpricing for family firms with non-family member CEO should be lessened with the increasing number of
family members in the board.
In addition to internal governance factors from the traditional angle of information asymmetry, external governance environment
can have a profound impact on IPO underpricing. In particular, the legal protection of minority shareholders plays an important role.
This includes the legal protection for the execution of contract and justice of procedure, the local judicial level, judicial efficiency,
and so forth. Overall, legal policies will influence the future development of the company through path dependence (Holmen and
Hogfeldt 2004). Lack of legal protection of investors may lead to less protection of property rights (Johnson et al. 2002), more
external financing obstacles to firms (Beck et al. (2005)) and hence fewer investment expansions (Claessens and Laeven (2003)). A
good legal environment helps reduce both types of agency problems. China exhibits regional differences in legal environment, IPO
underpricing may be different due of the variation in quality of local law enforcement.
The effect of the legal aspects on IPO underpricing has attracted academic attention. Lowry and Shu (2002) find evidence
supporting litigation risk as an explanation for underpricing of IPO issues. They find the insurance effect for IPO underpricing. In
particular, firms with higher litigation risk underprice their IPOs by a greater amount as a form of insurance. IPO firms and un-
derwriters intentionally underprice their shares to insure against future liability. They find evidence consistent with deterrence effect,
i.e., higher underpricing lowers expected litigation costs.
The likelihood of being sued is associated with the local legal environment. It is a complex process as to how the legal protection
of outside investors interacts with family ownership and underpricing of IPOs. The aspects of legal environment, such as the ef-
fectiveness of contract enforcement and the protection of property rights, can interact with firm ownership structure and the IPO
underpricing in different directions. As Allen and Faulhaber (1989) argued that, a problem “in selling information is related to the
credibility of that information. It may be difficult or impossible for potential users to distinguish good information from bad.” Legal
environment is perhaps positively correlated to the credibility of the information disclosed by firms. Better legal protection could lead
to more transparent and trustworthy disclosure environment, thus making it less costly for outside investors to verify the information
disclosed. Investors are more likely to believe that family firms' willingness to invest in their own projects is a positive signal of the
true quality of the project. In this sense, family firms' IPO underpricing should be lower in regions with better legal environment.
On the other hand, if the expected litigation cost is high, we should expect that the IPO underpricing for both family and non-family
firms in better legal environment region be lower than those in bad legal environment region. Greater protection of outside investors will
enable the market to fund even non-family firms with greater confidence. Also protection of outside investors should reduce the additional
layer of agency problem created by family ownership. This will predict less difference between the extent of underpricing of family and
non-family firms in regions with strong enforcement. Thus litigation risk alone in this case does not predict the relative magnitude of IPO
underpricing for family vs. non-family firms. In view of above reasons, we therefore propose the following competing hypotheses.
H3a. To the extent that better legal protection could reduce the dark-side of agency problems and thus could be conducive to more
trustworthy disclosure environment, outside investors will be more likely to take family firms' investment in their own projects as a
positive signal, thus family firms' IPO underpricing should be particularly smaller than non-family firms in regions with better legal
environment.
H3b. To the extent that better legal enforcement could lead to a higher litigation risk and if litigation risk outweighs other factors, the
IPO underpricing for both family and non-family firms in better legal environment region should be greater than those in bad legal
environment region.
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3. Research design
3.1. Sample selection and data sources
A family business refers to a corporation that is owned or controlled by a family, and that at least two of its family members
actively participate in the business management and operation. This paper adopts following standards to define a family business: (1)
the actual owner can be traced back to a person or family; and (2) in the actual owner's family, at least two members hold the
positions of Director, Supervisor or Senior EXecutive in the corporation. The latter standards are also in agreement with the defi-
nitions of the family business put forward by Villalonga and Amit (2006, 2009, 2010) and Anderson and Reeb (2003).
As part of the sampling process, we selected all private enterprises that went IPO and publicly issued ‘A' Shares from 2007 to 2014
on the medium and small enterprises (SEM) board in the A-share main board on Shenzhen Stock EXchange. Our data ends in 2014
because China imposed a cap for IPO underpricing after 2014. Our data do not include the privately-held companies listed on the
Start-up board (GEM) and the New-Third-Board, because the listing conditions for those boards are significantly different from that of
the main board. The controlling shareholders in our sample are either natural persons or family. Therefore, our sample does not
contain any state-controlled companies. We do not include any state-controlled companies because they operate under a different
business environment and are not comparable to privately-owned listed companies. For example, state companies enjoy greater
growth opportunities and better access to external finance derived not from fair competition but preferential government policies.
Also, the agency problems and informational environment for privately-owned listed companies are strikingly different from those of
state-controlled listed companies. We also eliminated the following firms: (1) firms whose prospectus did not provide a clear in-
dication about whether or not there exist family relationships among its directors, supervisors and senior managers; (2) firm s that
issued an ‘H' Share before initially issuing an ‘A' Share; and (3) firms whose data is incomplete. Following the procedure, we obtained
506 private enterprises for the total sample.
We collect information about family relationships between each business' current owner and its directors, supervisors and senior
managers from firms' prospectus. Based on the information, we further identify actual controlling family members and construct the
variables such as “Non-family CEO,” “percentage of family directors,” etc. The data on IPO including the IPO dates, IPO returns on the
first day of trading, and financial data before IPO were drawn from the CSMAR database. Other information including market share,
underwriter rankings, market index returns, and so forth, were drawn from the WIND database.
3.2. Variable definitions
3.2.1. Dependent variable

The dependent variable in this paper is IPO underpricing; that is, the IPO rate of return on the first day of trading. The formula is:
(Pc P0 )
Underpricing =
P0
In the above equation, Pc represents the closing price of IPO on the first day of trading, P0 is issuing price of shares. For robustness,
we also use market return adjusted IPO underpricing:
1 + Underpricing
Underpricing (Market adjusted) = 1
1 + Rm
where Rm represents the market return on the first day of listing; the formula for calculating Rm is:
Pm1
Rm = 1
Pm0
where Pm1 is the composite index on the first day of listing; Pm0 is the composite index on the initial offering day.
3.2.2. Independent variables for main effects

3.2.2.1. Variables related family firms.. To analyze the effect of family firm governance and its legal environment on the information
asymmetry, we define the following independent variables. “Family Firm” is a dummy variable that takes a value of 1 if at least two
family members hold the posts of director, supervisor and senior manager, and 0 otherwise. “Family CEO” is a dummy variable that
takes a value of 1 if a company's CEO is a family member and 0 otherwise. “Non-Family CEO” is dummy variable that is equal to 1 if
the CEO is a non-family member and 0 otherwise. “Percentage of family directors” is the proportion of family-member directors in the
total number of Board members.
3.2.2.2. Regional legal environment. “Regional Legal Environment” is the local legal environmental index of the region where the
corporation is located. We obtain the data from the Business Environment Index for China's Provinces 2013 Report (Wang et al. 2013),
which includes data from 29 provinces, autonomous regions, and municipalities, except for Xizang and Qinghai, whose data are not
available. This index, which has been used extensively in many recent academic studies in China (e.g., Huang, J.C., Zhu, B, Xiang,
2014), is constructed by the National Economic Research Institute of China Reform Foundation and the China Entrepreneur Survey
System after a survey across 4000 to 6000 firms nationally. This index consists of two sub-indices: “protection of legal rights and
interests of corporate owners” and “judicial justice and efficiency.” The first index measures whether or not all the rights of
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corporations can effectively be protected. It further contains three numerical scores for 1) the protection of shareholders' personal and
property rights, 2) the degree of protection of a corporation's intellectual property rights, and 3) the situation on the implementation
of contracts, respectively. The second index measures the degree of justice and efficiency related to law enforcement in the judicial
system. It contains two numerical scores, one for law enforcement efficiency and the other for judicial justice. The Regional Legal
Environment Index is the weighted average of all five scores discussed above. The range of the index values is from 0 to 5, among
which 3 is a neutral evaluation, below 3 is a comparatively negative evaluation (weaker legal environment), and above 3 is a
relatively positive evaluation (stronger legal environment). Considering the lagged effect, we use the previous year's legal
environment data in the corporation's registered region before IPO listing as the Legal Environment Index.
3.2.3. Control variables

Much of the firms' intrinsic values, profitability, and risk exposures can be reflected in their financial numbers. We select the
following firm characteristics variables as controlling variables. “Ownership” is the proportion of the current controlling share-
holders' ownership after the IPO offers are issued, which amounts to the ownership possessed by controlling shareholders by way of
direct shareholding, interlocking shareholding or pyramidal shareholding, and so on. It is also called cash flow right. The ownership
calculation in this paper is similar to the methods of La Porta et al. (1999) and Claessens et al. (2000). “Agency Cost” is the proXy for
the degree of agency cost. Following Ang et al. (2000), we use the ratio of managerial expenses to total assets as the proXy for agency
cost. Managerial expenses include compensation, travel and entertainment, a variety of benefits and subsidies, and other perquisites.
For robustness, we also use the ratio of controlling shareholders' controlling rights to the cash flow rights as the pro Xy for the degree
of agency cost. This variable reflects the degree of separation between the actual controlling shareholders' controlling rights and
ownership. “Venture Capital” is a dummy variable that takes a value of 1 if there are risk investment or venture investment in-
stitutions among the top 10 shareholders before the corporation's offerings, and 0 otherwise. If a shareholder's business disclosed in
the prospectus of the listed corporation relates to venture investment, risk investment, high-tech investment and so on, and the
shareholder has no connection with the corporation's actual controller and senior managers, then the company is deemed to have
venture capital investment.
Besides the ownership and controlling rights variables, we also control for the IPO issuance related variables. “Underwriter rank
15” is a dummy variable that takes the value of 1 if the market shares of an IPO corporation's underwriter are ranked among the top
15. The market shares of the underwriter are taken to be the proportions of the main underwriter's total value of IPO underwriting
from 2007 to 2014 in the market's total value of IPO underwriting over the same period. The ranking of an underwriter's market
shares measures his/her reputation; a large number of IPO documents indicate that underwriters with a good reputation can help the
IPO corporation to lower its underpricing (Carter and Manaster 1990; Carter et al. 1998), as well as transmit information about the
corporation's high value to investors. Chen, Shi, and Xu, (2013) found that underwriter reputation is related to pre-IPO earnings
management and post-IPO performance. We, therefore, control for underwriter reputation. “CPA rank 20” is a dummy variable that
takes the value of 1 if the auditing firm of the IPO corporation is ranked among top 20 in the comprehensive evaluation of accounting
firms issued by the Chinese CPA Association in that year and 0 otherwise. This variable measures the auditor's reputation. The
auditing quality can be reflected in the reputation of its auditors. An auditor with a good reputation will lower the risk of an IPO
company; a corporation can also transmit signals as to the quality of its financial statements by employing accounting firms with a
well-established reputation.
We further control for market and firm characteristics variables. “Market return 30 days before IPO” is the accumulative rate of
return on the Shanghai Stock EXchange composite index for 30 days before IPO. This variable controls the market returns at the time
of listing. “Log (assets)” is the natural logarithm of total assets in the year before IPO was issued, which was disclosed in the IPO
corporation's prospectus. It measures the total scale of the corporation. “Debt to assets ratio” is the asset-liability ratio in the year
before IPO was issued, which was disclosed in the IPO corporation's prospectus. It is known as financial leverage and measures the
corporation's financial risk and debt-paying ability. “ROE” is the weighted average return on net assets the year before IPO was
issued, which was disclosed in the IPO corporation's prospectus. It measures the corporation's profitability. “Year dummy” is the
dummy variable for the IPO year. “Industry dummy” is a dummy variable for the industry classification of the samples according to
Industry Classification Guidelines for Listed Companies, revised by the China Securities Regulatory Commission (CSRC) in 2012.
We further control for some unique firm characteristics variables. These variables include “Info_Asymmetry,” which is the re-
ciprocal of the number of financial analysts following the company. This variable pro Xies for the level of information asymmetry; a
higher number suggests a greater information asymmetry. “Independent directors” is the proportion of independent directors on the
board. “Management compensation” is the logarithm of the total amount of salary of the board members and senior management.
“Political connection” is the dummy variable that takes the value of 1 if the controlling shareholders have a political connection and 0
otherwise. AppendiX I provides definitions of the variables and data sources.
3.3. Descriptive statistics
Table 1 shows the annual sample distribution and corresponding IPO underpricing levels. Among the total sample of 506 privately
owned exchange-listed corporations, there are 284 family corporations. This accounts for 56.1% of the total sample, indicating that
family corporations have played an important role in issuing new IPO shares on the SEM Board. Due to policy changes, the number of
IPO corporations each year is seen to fluctuate greatly. The most prosperous periods of the IPO market occurred in 2010 and 2011,
with the numbers of the initial offering corporations reaching 167 and 103. In other years, there were only approXimately 25–65 each
year; in 2013, IPO was even suspended, without any new IPO issuance. EXcept 2007, during which family corporations accounted for
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Table 7
Sample distribution and descriptive statistics of IPO underpricing.
IPO Underpricing
Year Number Mean SD Min Max
2007 65 2.177 1.090 0.738 5.381

Family Firm 23 1.944 0.697 0.759 2.974
Non-family Firm 42 2.305 1.243 0.738 5.381
2008 54 1.228 0.962 0.077 4.035
Family Firm 31 1.093 0.914 0.077 3.784
Non-family Firm 23 1.410 1.014 0.153 4.035
2009 46 0.626 0.364 0.232 2.069
Family Firm 24 0.600 0.407 0.252 2.069
Non-family Firm 22 0.655 0.318 0.232 1.308
2010 167 0.415 0.448 −0.075 2.753
Family Firm 91 0.382 0.444 −0.064 1.860
Non-family Firm 76 0.454 0.451 −0.075 2.753
2011 103 0.192 0.299 −0.263 1.494
Family Firm 69 0.192 0.319 −0.263 1.494
Non-family Firm 34 0.193 0.258 −0.119 0.867
2012 45 0.325 0.934 −0.097 6.267
Family Firm 29 0.367 1.155 −0.095 6.267
Non-family Firm 16 0.250 0.236 −0.097 0.707
2014 26 0.443 0.005 0.440 0.455
Family Firm 17 0.442 0.005 0.440 0.453
Non-family Firm 9 0.445 0.006 0.440 0.455
Total 506 0.695 0.909 −0.263 6.267
Family Firm 284 0.560 0.771 −0.263 6.267
Non-family Firm 222 0.868 1.036 −0.119 5.381
This table shows the annual sample distribution and corresponding IPO underpricing levels. The total number of observation is 506, of which 284
are family firm observations. A firm is classified as a family firm if it is owned or controlled by a family, or there are at least two family members
participating in the actual management of the firm.
35.38% of total IPO corporations, the proportions of family firms in total IPO firms were all above 50% in all other years during the
period 2008 to 2014 and were comparatively stable. There is a variation in IPO underpricing over time. In 2007, the average level of
underpricing reached 217.7%, while the highest level of underpricing reached 538%. In 2008, the average level of underpricing
decreased to 122.8%, while from 2009 to 2011 the average level of underpricing reduced steadily to 19.2%, approaching the in-
ternational norm of underpricing level. In 2012 and 2014, the average level of underpricing increased slightly, to 32.5% and 44.3%
respectively. Comparing the IPO underpricing between family businesses and non-family businesses, we found that, except 2012, the
IPO average level of underpricing of a family business each year was lower than that of non-family businesses.
Table 2 shows the legal environment indices of the main provinces, autonomous regions and municipalities, and the number of
newly listed private corporations as well as the number of family corporations each year during the sample period. Considering that
the legal effect takes time, the legal environment data reported in Table 2 lags by one year. There exist significant differences between
both the legal environment in different regions and the number of listed companies in different cities. The legal environment index
seems to be positively correlated with the number of IPO in the region. The regions with the higher numbers of listed private
corporations include Guangdong, Zhejiang, and Jiangsu, with a total number of 271 and accounting for 53.56% of the whole sample.
These regions included 166 family corporations, accounting for 58.45% of the total sample. The legal environments in these three
provinces are also relatively strong. In Shanxi, Heilongjiang, Hainan, Guizhou, Gansu, Ningxia and so on, there were only 1 to 2 listed
private corporations each year, and these regions' legal environments were also relatively low. During this period, there was no listed
private corporation in Shaanxi. While the legal environment indices of most regions rose sharply, in some regions, such as Hebei, the
legal environment did not undergo a marked improvement; even in the individual region, such as Jiangxi, there appeared to be an
inverted U shape trend.
Table 3, columns (1) to (5), reports the descriptive statistics of all privately-owned listed firms. We winsorize IPO underpricing
values at the 99th percentile to mitigate the influence of extreme values. The average level of underpricing for all privately-owned
listed firms is 68.4%, with the lowest value at −11.8% and the highest value as high as 403.5%. After adjusting the market rate of
return, the average level of underpricing is 67.7%, with the lowest value at −10.3% and the highest value at 414.3%.
Across the total sample of private corporations, the IPO listed companies' age since their first establishment ranges from 4 to
29 years. Since companies can only apply for the IPO if they have been in operation for more than three years, thus our sample of
privately-owned listed companies are all longer than three years old. We further divide the sample into young family firms (less than
or equal to 10 years old), and old family firms (more than ten years old). For example, family firms that were established <10 years
ago accounted for 29%, while those that were over 10 years old accounted for 27%. In the sample, the average value of controlling
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Table 2
Local legal environment index and number of IPO companies.
Province 2007–08 2009–10 2011–12 2013–14 Province 2007–08 2009–10 2011–12 2013–14
Beijing Legal Env. 3.07 3.34 3.18 3.33 Henan Legal Env. 2.91 3.14 3.08 3.14
Private Co 4 13 11 4 Private Co 3 7 4 1
Family Co. 0 3 7 1 Family Co. 2 5 3 1
Tianjin Legal Env. 3.13 3.32 3.28 3.63 Hubei Legal Env. 2.91 3.19 3.09 3.15
Hebei Legal Env. 3.02 3.24 3.00 3.00 Hunan Legal Env. 2.82 3.17 3.06 3.07
Shanxi Legal Env. 2.85 3.05 3.08 3.17 Guang Legal Env. 3.07 3.24 3.11 3.21
Private Co 0 1 1 0 dong Private Co 29 47 27 10
Neimenggu Legal Env. 3.07 3.26 3.08 3.17 Guangxi Legal Env. 2.91 3.19 2.96 3.32
Liaoning Legal Env. 3.04 3.26 3.09 3.19 Hainan Legal Env. 2.80 3.07 3.00 3.21
Jilin Legal Env. 3.07 3.39 3.11 3.35 Chong qing Legal Env. 2.94 3.24 3.27 3.33
Heilongjiang Legal Env. 2.94 3.20 2.96 3.30 Sichuan Legal Env. 3.05 3.28 3.16 3.23
Shanghai Legal Env. 3.30 3.47 3.36 3.36 Guizhou Legal Env. 2.86 3.22 2.90 3.16
Jiangsu Legal Env. 3.20 3.40 3.27 3.32 Yunnan Legal Env. 2.99 3.21 3.20 3.09
Zhejiang Legal Env. 3.21 3.36 3.20 3.32 Shanxi Legal Env. 2.84 3.19 3.03 3.20
Anhui Legal Env. 3.14 3.30 3.25 3.27 Gansu Legal Env. 2.81 3.04 3.06 3.02
Fujian Legal Env. 3.07 3.26 3.15 3.26 Ningxia Legal Env. 2.74 3.14 2.90 3.02
Jiangxi Legal Env. 2.88 3.26 3.13 3.01 Xinjiang Legal Env. 2.95 3.18 2.92 3.00
Shandong Legal Env. 3.10 3.24 3.12 3.20
Private Co 9 21 10 0
Family Co. 4 9 5 0
This table shows the local legal environment indices of each of the provinces, autonomous regions and municipalities directly under the central
government. The table also shows the number of newly listed private corporations as well as the number of family corporations each year during the
sample period. The legal environment variable is lagged by one year because it is included in the multivariate analyses as lagged values. The legal
environment index is constructed by the Reform Foundation of China National Economic Research Institute and the China Entrepreneur Survey
System, which included a survey across 4000 to 6000 firms nationally. This index consists of two sub-indices: judicial justice and efficiency, and the
protection of shareholders' lawful rights and interests. The value of this index ranges from 0 to 5, with 3 or a lower number being a relatively weaker
legal environment and a number above 3 being a comparatively stronger legal environment.
shareholder's ownership following the company's initial public offerings was 42.63%, with the highest value reaching 84.13%; this
indicates that the controlling shareholder still maintains a rather high proportion of ownership after their corporation's listing. The
degree of agency cost, which is the ratio of managerial expenses to total assets, has a mean value of 7% and a maximum value of 33%
for all privately owned firms.
Among the top 10 shareholders prior to the initial public offerings, about 45.3% of companies had venture capital investment,
suggesting the high participation of venture capital investment among these planned IPOs. The IPO corporations whose underwriters
ranked among top 15 accounted for 57%; the IPO corporations whose auditing firms ranked among the top 20 accounted for 61%.
The average accumulative rate of return of the Shanghai Stock EXchange composite index for 30 days before IPO was −0.67%. The
listing time of the corporations is usually controlled by the CSRC, meaning that IPO corporations cannot freely choose a favorable
market time for IPO. The average value of the debt to asset ratio was 50.08%. The average value of the weighted average return on
net assets (ROE) in the year before IPO was 31.32%. The average value of the natural logarithm of the total assets was 20.18.
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Columns (6) to (10) of Table 3 reports the descriptive statistics of the variables from a sub-sample of family firms. The average
underpricing of the family firms was about 55.34%. The family corporations whose CEO is a non-family member accounted for 26.1%
only; this indicates that the majority of family firms still elect their CEO from among family members. The average proportion of
family directors on the Board was 28.61%, with the lowest proportion being 9.09% and the highest proportion 55.56%. This suggests
that in family firms, family directors on average take up nearly 30% voting rights, which is below the simple majority. The average
age of listed IPO family firms was 11.17 years, with family firms aged under 10 years accounting for 51.4% of the sample. The
average legal environment index of the regions where the family corporations were located was slightly higher than 3. The ownership
of the actual controlling shareholder was, on average, 46.61%, with the maximum value being 84.13% and the minimum at 15.03%.
The average value of agency cost (ratio of managerial expenses to total assets) was 6%, with a maximum value of 22%. 44.7% of
family firms received investment from venture capital investment in IPOs. 59.5% of family firms hired underwriters ranked among
the top 15, while 63.7% of family firms selected accounting firms ranked before the 20th. The average cumulative return of the
Shanghai Stock EXchange Index for 30 days before IPO was −1.26%. The average natural logarithm of total assets was 20.25, and the
average ratio of asset to liability was 50.16%. The average value of the ROE (weighted average return on net assets) was 32.06%.
Column (11)–(14) of Table 3 reports the test of mean differences in IPO underpricing, corporate governance, and other variables
between family and non-family corporations. There are 284 family firm observations and 222 non-family firm observations. Results
show that there exist significant differences between the means of the two groups of samples. The difference in IPO underpricing
between non-family and family firm is 29.78% (29.50% after adjusting for market return.) and is statistically significant at the 1%
level. This result is consistent with Hypothesis H1a. The ownership proportion of the controlling shareholder of family firms was
higher than that in non-family firms at the significance level of 1%, indicating that family firms are more inclined to keep a higher
level of ownership within the family following IPO. At the significance level of 1%, the degree of agency cost of a family firm was
lower than that of a non-family firm. This suggests that the agency problem between the controlling shareholder and minority
shareholder may be less severe in the family firms than in the non-family firms. At the significance level of 5%, the total assets of
family firms were greater than that of the non-family firm. There is no significant difference in other variables such as the number of
analysts following the company, proportion of independent directors, managerial compensation, CEO's political connection, leverage,
ROE, etc., between the family and non-family firms. We also run a Pearson correlation matriX of the main variables. There is no
significant correlation between the independent variables, meaning that no multicollinearity exists among the independent vari-
ables.4
4. Empirical findings
In this section, we conduct a pooled-OLS regression of IPO underpricing against various independent variables to examine the
impact of family firms' governance structure and local legal environment on IPO underpricing. For the full sample that includes
family and non-family firms, we run a regression to test the difference in IPO underpricing between family and non-family firms, and
how the local legal environment may affect the difference in the IPO underpricing.
We further run regressions within the sub-sample of family firms to examine the effect of non-family CEO and proportion of family
member directors on IPO underpricing. In particular, we include the interactions of non-family CEO and the proportion of directors
from family members to examine the impact of non-family CEO on IPO underpricing and whether the effect of non-family CEOs may
vary with the proportion of family member directors. The coefficient of the interaction of non-family CEO and percentage of family
directors indicates that when the percentage of family directors increase by one unit, how much the mean difference in IPO un-
derpricing between the companies with non-family CEO minus the reference group (family CEO) is predicted to change.
To examine the effect of the local legal environment, we include the two way and three-way interactions of legal environment
index, non-family CEO and the proportion of family member directors. The three-way interaction (Non-family CEO * Percentage of
family directors * Legal environment) tells us how the two-way interaction parameter (for Non-family CEO * Percentage of family
directors) changes when legal environment index changes by one unit. A negative coefficient means that the mitigating role of
percentage of family member directorship is stronger when the legal environment index increases. In all regressions, we control for
year and industry fiXed effect to adjust for hot and cold equity markets and industry heterogeneity. Also, we use year by industry
fiXed effects to control for industry varying time trends. We use 14 major industries according to classification by China's Securities
Regulatory Commission.
4.1. Effect of family control on IPO underpricing
Table 4, Panel A reports the pooled-OLS regression result for the full sample of privately owned listed companies. Columns 1 to 7
show the results with IPO underpricing rate as the dependent variable and columns 8 to 14 report the results with market return
adjusted IPO underpricing rate as the dependent variable. White Heteroscedasticity robust standard errors are reported. Results show
that, with other variables controlled, the coefficient for dummy variable Family Firm is negative at about the 5% significance level,
suggesting that the IPO underpricing rate of family business is smaller than that of non-family business. On average, the underpricing
of the family business is lower than non-family business by a 12.0% (or 12.6% for market return adjusted underpricing) margin,
controlling for other factors. It appears that the reduction of IPO underpricing for family firms is economically significant. This result
4
Results on Pearson correlation matriX are not reported for brevity, but available upon request.
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Table 3
Descriptive statistics of privately-owned listed firms.
Variables Privately Owned Firms Family Firms Test of Mean Difference between Non-family Firms and Family Firms
Number of Mean SD Min Max Number of Mean SD Min Max Non-family Firms Family Firms Difference t-statistic
Obs. Obs.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
Underpricing (%) 506 68.41 85.38 −11.81 403.54 284 55.34 72.13 −11.81 403.54 85.12 55.34 29.78 3.95***
Underpricing (Marker adjusted) 506 67.70 83.73 −10.32 414.33 284 54.75 69.630 −10.32 414.33 84.25 54.75 29.50 3.99***
(%)
Family Firm 506 0.56 0.50 0 1 284 1 0 1 1 0 1 −1 –
Non-family CEO 506 0.15 0.35 0 1 284 0.26 0.44 0 1 0 0.26 −0.26 −8.83***
Percentage of family directors (%) 506 16.06 15.91 0 55.56 284 28.61 9.56 9.09 55.56 0 28.61 −28.61 −44.6***
Region Legal Environment 503 3.20 0.10 2.81 3.47 281 3.21 0.10 2.88 3.47 3.20 3.21 −0.01 −1.17
Young Family Firm (Age ≤10) 506 0.29 0.45 0 1 284 0.51 0.50 0 1 0 0.51 −0.51 −10.3***
Old Family Firm (Age > 10) 506 0.27 0.45 0 1 284 0.49 0.50 0 1 0 0.49 −0.49 −14.5***
Age 506 11.00 4.17 4 29 284 11.17 4.19 4 29 10.78 11.17 −0.39 −1.04
1
Ownership (%) 506 42.63 16.10 5.89 84.13 284 46.61 15.03 12.83 84.13 37.54 46.61 −9.06 −6.54***
0
Agency cost 506 0.07 0.04 0.01 0.33 284 0.06 0.03 0.01 0.22 0.07 0.06 0.01 3.54***
Venture Capital 506 0.45 0.50 0 1 284 0.45 0.50 0 1 0.46 0.45 0.01 0.27
Info_asymmetry 481 0.15 0.12 0.03 0.5 272 0.14 0.11 0.03 0.5 0.16 0.14 0.02 1
Independent director 504 0.37 0.05 0.25 0.57 282 37.08 5.10 25 57.14 0.37 0.37 −0.003 −0.73
Management compensation 506 6.307 0.288 5.307 7.544 284 6.31 0.28 5.53 7.54 6.30 6.31 −0.01 −0.25
Political connection 506 0.08 0.28 0 1 284 0.09 0.29 0 1 0.07 0.09 −0.02 −0.79
Regional average income 506 40,324 13,299 18,144 102,268 284 40,430 12,544 18,144 102,268 40,188 40,431 −243 −0.20
Underwriter rank15 506 0.57 0.50 0 1 284 0.59 0.49 0 1 0.54 0.60 −0.06 −1.33
CPA rank20 506 0.61 0.49 0 1 284 0.64 0.48 0 1 0.58 0.64 −0.06 −1.29
Market return 30 days before IPO 506 −0.67 10.80 −29.04 42.10 284 −1.26 9.75 −29.04 29.91 0.10 −1.26 1.36 1.41
(%)
Log (assets) 506 20.18 0.74 18.59 24.69 284 20.25 0.74 18.75 24.69 20.10 20.25 −0.15 −2.32**
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Debt to assets ratio (%) 506 50.08 15.04 7.99 94.28 284 50.16 14.56 7.99 84.75 49.98 50.16 −0.17 −0.13
ROE (%) 506 31.32 14.10 10.09 168.83 284 32.06 16.31 11.20 168.83 30.37 32.06 −1.69 −1.34
asinF
This table shows the descriptive statistics of all privately-owned listed firms (columns (1)–(5)) and the sub-sample of family firms (columns (6)–(10)). Column (13) and (14) report the mean differences
in
and t-statistics in IPO underpricing, corporate governance, and other variables between family and non-family corporations. There are 284 family firm observations and 222 non-family firm observations.
a
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Descriptions of variables are shown in AppendiX I. We winsorize IPO underpricing values at the 99th percentile. The sample includes all private enterprises that went IPO and issued ‘A' Shares from 2007
to 2014 on the medium and small enterprises (SEM) board in the A-share main board on Shenzhen Stock EXchange.
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suggests that companies with multiple family members in the board or top management may send investors a signal of high-quality
governance and family firms' persistent pursuit of enhancing corporate value, which would, in turn, reduces IPO underpricing. This
evidence is consistent with Hypothesis H1a as well as H2a.
The results from columns 2 to 7 and 9 to 14 show that the coefficient for the variable Regional Legal Environment is negative at a
1% level of significance, meaning that the better the regional legal environment is, the lower the IPO underpricing will be. The
coefficient of ‘Family Firm’ remains negative and significant at roughly the 5% level after the legal environment index is controlled. A
good regional legal environment ensures that contracts can be honored, legal protection of investors can be enforced timely and
impartially, the rights of owners can be better protected. Meanwhile, with increased cost for breaching the contract, it would become
riskier for the management to seek personal benefit by harming shareholders' rights. Conversely, the cost for the shareholders to
monitor management and to overcome the principal-agent problem between shareholder and management should reduce. Hence, the
better the regional legal environment is, the more likely that information disclosure will be deemed reliable and the positive signal
from family firms could be more credible in the eyes of external investors, which in turn leads to a smaller underpricing.5
We further divide family businesses into young family firms and old family firms, according to the median age of all family firms
in the sample (which is 10 years) and test the significance separately. Because the total sample includes both family and non-family
firms, we included dummy variables for both young family firms and old family firms. The results from columns 3 and 10 show,
respectively, that the coefficient of Young Family Firm is negative at the 10% significance level for both unadjusted and adjusted
underpricing. This suggests that the phenomenon of lower IPO underpricing of family firms mainly exists in young family firms which
are founded in <10 years. In the meantime, no significant difference in IPO underpricing is observed between family firms older than
10 years and non-family firms. To the extent that young firms face greater information asymmetry problem, this evidence lends
support to the information asymmetry argument as in Hypothesis 1a.
Columns 4 and 11 in Table 4 report the difference in IPO underpricing of family firms with different types of CEO. In this test, family
firms are categorized based on whether the CEO is a family member with controlling interest (dummy is equal to 1) or not (dummy is equal
to 0). The regression results show that family CEO significantly reduces the IPO underpricing of the firm; the coefficient of Family CEO is
−16.5% (or − 17.0% for regression with market adjusted IPO underpricing) and is significant at the 5% level. This means, on average,
family firms with a family-member CEO will have an IPO underpricing rate about 16–17% lower than non-family firms and family firms
with a non-family CEO. On the other hand, family firms with a non-family member CEO displayed no significant difference from non-family
firms regarding IPO underpricing. This suggests that the family's owner's monitoring could be an important source of lower underpricing of
family firms. The evidence thus supports H2a and H2c. However, the evidence does not rule out the information asymmetry argument.
In Columns 5, 6 and 7 (10,11, and 12 for the market, we include the dummy variables for high vs. low agency cost family firms,
high vs. low information asymmetry family firms, and large vs. small family firms based on the mean values of those variables. Their
coefficients are not strikingly different. We also conduct F-test to examine the difference between the coefficients of the above
variables. Results, reported in the bottom panel of Table 4, show that at the 5% level, the coefficient of family CEO dummy is
significantly different from the coefficient of non-family CEO. All other coefficients are not significantly different.
Some control variables show a significant effect on IPO underpricing. The coefficient of the ownership proportion of the actual
controller is significantly positive at the 5% level, indicating that concentrated ownership proportion of actual controlling share-
holder increases IPO underpricing. There is a significantly positive relationship between prior market return and IPO underpricing
rate; in periods with the high market return, the rate of first-day return of IPO is also high. The coefficient of total asset size is
negative at the 1% significance level, indicating that the larger the size of the company is, the lower the issuing risk as well as, the
lower the level of information asymmetry should be, leading to a lower rate of IPO underpricing. The coefficient of the weighted
average of ROE is negative and significant at the 5% to 10% level. This means that the better the profitability an IPO company has,
the lower the IPO underpricing it would have. The proportion of independent directors has a negative effect on IPO underpricing.
In order to further test the IPO underpricing of family and non-family firms in regions with different legal environments, we
divide regions into the one with a good legal environment and the one with a bad legal environment based on the annual median
value of Regional Legal Environment index. Panel B of Table 4 shows the test results for the two samples grouped by the regional
legal environment. Columns 1 to 6 shows the regression results for firms in regions with a relatively good regional legal environment,
columns 6 to 12 shows the regression results for firms in regions with a relatively bad regional legal environment. Result in column 1
shows that the coefficient of Family Firm is negative on the 10% level of significance, contrasting the insignificant result in column 4
for the same variable in regions with a relatively bad legal environment.
Results also show that the coefficient for Young Family Firm is negative with a significance level of 10% only in the region with a
relatively good legal environment, while it is not significant for firms in regions with a relatively bad legal environment. Similarly,
the coefficient of Family CEO is significantly negative at the 10% level while in column 9 the same variable is not significant.
Furthermore, the dummy variables for high and low agency cost family firms, high and low information asymmetry family firms, and
large and small family firms are not significant in regions with a relatively bad legal environment. Taken together, the results indicate
that the negative influence of family ownership, young family firms, and family-member CEOs only hold for firms in regions with a
good legal environment. Under better legal protection, family firms, especially those family firms with family-member CEOs, have a
natural advantage in solving the first type of principal-agent problem, i.e., the conflict between shareholders and management. A
5
We also include the two sub-indexes of legal environment index, i.e., “Protection of interests of corporation owners” and “Judicial Justice and
efficiency” in the regression and find that “Protection of interests of corporation owners” is significantly negative in the regression for privately
owned listed companies. This indicates that “protection of property rights of corporation owners” is more important.
1
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Table 4
IPO Underpricing of Privately Owned Listed Companies.
Panel A. IPO underpricing of family and Non-family firms a
Variables Underpricing
(1) (2) (3) (4) (5) (6) (7)
Family Firm −0.133 ⁎⁎ −0.120⁎⁎

(0.055) (0.054)
Young Family Firms (Age ≤10) −0.164⁎⁎⁎
(0.063)
Old Family Firms (Age > 10) −0.069
(0.067)
Family CEO −0.165⁎⁎⁎
(0.058)
Non-family CEO 0.003
(0.081)
High agency cost family firm −0.132⁎
(0.067)
Low agency cost family firm −0.103⁎
(0.062)
High info_asymmetry family firm −0.153⁎⁎
(0.068)
Low info_asymmetry family firm −0.117⁎
(0.059)
1
2
Large family firm −0.096

(0.067)
Small family firm −0.118
(0.073)
Region Legal Environment −1.374⁎⁎⁎ −1.383 ⁎⁎⁎ −1.411 ⁎⁎⁎ −1.379⁎⁎⁎ −1.435 ⁎⁎⁎ −1.482 ⁎⁎⁎
(0.410) (0.413) (0.406) (0.412) (0.402) (0.435)
Agency cost −0.790 −0.734 −0.767 −0.745 −0.323 0.395
(0.843) (0.835) (0.835) (0.829) (0.873) (0.811)
Info_asymmetry 0.264 0.051 0.045 0.077 0.073 0.246
(0.267) (0.256) (0.258) (0.253) (0.250) (0.264)
Log(assets) −0.235 ⁎⁎⁎ −0.214⁎⁎⁎ −0.210⁎⁎⁎ −0.213 ⁎⁎⁎ −0.201 ⁎⁎⁎ −0.208⁎⁎⁎
(0.063) (0.063) (0.062) (0.063) (0.059) (0.061)
P
Independent director −1.275⁎⁎ −1.216 ⁎⁎ −1.206 ⁎⁎ −1.172 ⁎⁎ −1.222 ⁎⁎ −1.332 ⁎⁎ −1.131 ⁎⁎
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(0.561) (0.551) (0.553) (0.555) (0.551) (0.535) (0.545)
Management compensation 0.142 0.109 0.108 0.094 0.077 0.121 −0.138
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(0.110) (0.113) (0.113) (0.111) (0.113) (0.113) (0.103)
Political connection 0.074 0.049 0.047 0.052 0.044 0.008 0.024
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(0.110) (0.108) (0.106) (0.107) (0.109) (0.104) (0.111)
nceJo
Regional average income 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
urn
Ownership 0.408⁎⁎ 0.373⁎ 0.370⁎ 0.404⁎⁎ 0.376⁎ 0.387⁎ 0.351⁎
al5
(0.198) (0.191) (0.190) (0.191) (0.192) (0.201) (0.189)
7(2
Underwriter Rank15 0.021 0.011 0.006 0.012 0.013 0.003 −0.018
0
(0.054) (0.054) (0.054) (0.054) (0.054) (0.056) (0.057)
19
Venture Capital 0.023 0.028 0.035 0.029 0.028 0.033 0.044
)10
(0.055) (0.054) (0.053) (0.054) (0.055) (0.054) (0.055)
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Table 4 (continued)
Variables Underpricing
(1) (2) (3) (4) (5) (6) (7)
CPA Rank20 −0.006 0.002 0.010 0.002 −0.002 0.031 −0.016

(0.056) (0.055) (0.057) (0.055) (0.055) (0.055) (0.056)
Market return30 1.071 ⁎⁎⁎ 1.118⁎⁎⁎ 1.143 ⁎⁎⁎ 1.100⁎⁎⁎ 1.094⁎⁎⁎ 1.076⁎⁎⁎ 0.989 ⁎⁎⁎
(0.348) (0.338) (0.337) (0.336) (0.333) (0.341) (0.338)
Debt To Asset Ratio 0.100 0.074 0.045 0.044 0.091 0.116 −0.426 ⁎
(0.265) (0.266) (0.267) (0.266) (0.258) (0.270) (0.234)
ROE −0.433 ⁎⁎ −0.411 ⁎ −0.402 ⁎ −0.428⁎⁎ −0.422 ⁎ −0.478⁎⁎ −0.404⁎
(0.217) (0.215) (0.208) (0.211) (0.216) (0.229) (0.214)
Industry Yes Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes Yes
Year by Industry Yes Yes Yes Yes Yes Yes Yes
Constant 5.638⁎⁎⁎ 9.579⁎⁎⁎ 9.561⁎⁎⁎ 9.742⁎⁎⁎ 9.508⁎⁎⁎ 9.585⁎⁎⁎ 7.229⁎⁎⁎
(1.167) (1.577) (1.566) (1.590) (1.568) (1.485) (1.547)
N 479 476 476 476 476 501 476
R2 0.635 0.649 0.650 0.653 0.648 0.642 0.638
Test of equality of coefficients Young Family High agency High Large
family CEO = Non cost = Low asymmetry =- family
firm = Old family CEO agency cost Low firm = Sm-
family firm asymmetry all family
1
firm
3
F(1, 407) 1.79 4.33 0.15 0.27 0.07

Prob > F 0.1815 0.0380 0.6941 0.6035 0.7969
Variables Underpricing (Market return adjusted)
(8) (9) (10) (11) (12) (13) (14)
Family Firm −0.139⁎⁎ −0.126⁎⁎
P
(0.054) (0.053)
acific-B
Young Family Firms (Age ≤10) −0.169⁎⁎⁎
(0.061)
asinF
Old Family Firms (Age > 10) −0.077
(0.066)
in
−0.170⁎⁎⁎
a
Family CEO
nceJo
(0.057)
Non-family CEO −0.008
urn
(0.078)
al5
High agency cost family firm −0.143 ⁎⁎
7(2
(0.064)
0
Low agency cost family firm −0.108⁎
19
(0.061)
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Table 4 (continued)
(8) (9) (10) (11) (12) (13) (14)
⁎⁎
High info_asymmetry family firm −0.158
(0.067)
Low info_asymmetry family firm −0.128⁎⁎
(0.058)
Large family firm −0.087
(0.065)
⁎
Small family firm −0.138
(0.072)
Region Legal Environment −1.417⁎⁎⁎ −1.425 ⁎⁎⁎ −1.453 ⁎⁎⁎ −1.420⁎⁎⁎ −1.451 ⁎⁎⁎ −1.535 ⁎⁎⁎
(0.412) (0.414) (0.408) (0.414) (0.405) (0.437)
Agency cost −0.730 −0.669 −0.701 −0.679 −0.236 0.485
(0.856) (0.845) (0.846) (0.839) (0.876) (0.810)
Info_asymmetry 0.205 −0.014 −0.019 0.011 0.005 0.188
(0.264) (0.250) (0.252) (0.249) (0.244) (0.257)
Log(assets) −0.231 ⁎⁎⁎ −0.209⁎⁎⁎ −0.205 ⁎⁎⁎ −0.208 ⁎⁎⁎ −0.199⁎⁎⁎ −0.203 ⁎⁎⁎
(0.061) (0.061) (0.060) (0.061) (0.057) (0.059)
Independent director −1.289⁎⁎ −1.229⁎⁎ −1.219⁎⁎ −1.186⁎⁎ −1.235 ⁎⁎ −1.359 ⁎⁎⁎ −1.140⁎⁎
(0.544) (0.535) (0.537) (0.539) (0.535) (0.519) (0.534)
Management compensation 0.135 0.102 0.101 0.088 0.075 0.115 −0.150
1
(0.108) (0.111) (0.111) (0.109) (0.111) (0.112) (0.100)

4
Political connection 0.060 0.035 0.033 0.038 0.030 −0.004 0.007

(0.109) (0.106) (0.105) (0.105) (0.107) (0.103) (0.110)
Regional average income 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎ 0.000⁎⁎⁎
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Ownership 0.414⁎⁎ 0.378⁎⁎ 0.375 ⁎⁎ 0.408⁎⁎ 0.381⁎⁎ 0.396⁎⁎ 0.356⁎
(0.197) (0.188) (0.188) (0.188) (0.189) (0.199) (0.187)
Underwriter Rank15 0.013 0.002 −0.002 0.004 0.005 −0.004 −0.025
(0.054) (0.053) (0.053) (0.053) (0.053) (0.055) (0.057)
Venture Capital 0.036 0.040 0.047 0.041 0.040 0.045 0.056
(0.054) (0.053) (0.052) (0.053) (0.054) (0.053) (0.054)
CPA Rank20 0.002 0.010 0.017 0.010 0.006 0.036 −0.009
P
(0.055) (0.054) (0.056) (0.053) (0.054) (0.054) (0.055)
acific-B
Market return30 0.665⁎ 0.715 ⁎⁎ 0.740⁎⁎ 0.699⁎⁎ 0.694⁎⁎ 0.657⁎ 0.591 ⁎
(0.343) (0.333) (0.333) (0.332) (0.328) (0.335) (0.333)
asinF
Debt To Asset Ratio 0.159 0.135 0.106 0.106 0.152 0.176 −0.373
(0.264) (0.264) (0.265) (0.264) (0.256) (0.270) (0.236)
in
−0.403 ⁎ −0.379⁎ −0.370⁎ −0.396⁎ −0.389⁎ −0.439 ⁎⁎ −0.374 ⁎
a
ROE
nceJo
(0.214) (0.210) (0.203) (0.206) (0.210) (0.222) (0.208)
Industry Yes Yes Yes Yes Yes Yes Yes
urn
Year Yes Yes Yes Yes Yes Yes Yes
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Year by Industry Yes Yes Yes Yes Yes Yes Yes
7(2
Constant 5.397⁎⁎⁎ 9.464⁎⁎⁎ 9.446⁎⁎⁎ 9.621⁎⁎⁎ 9.410⁎⁎⁎ 9.360⁎⁎⁎ 7.272⁎⁎⁎
0
(1.087) (1.530) (1.520) (1.539) (1.518) (1.451) (1.526)
19
N 479 476 476 476 476 501 476
)1
2
R 0.627 0.643 0.644 0.646 0.642 0.634 0.632
0
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Table 4 (continued)
(8) (9) (10) (11) (12) (13) (14)
Test of equality of coefficients Young family Family High agency High Large family
firm = Old CEO = Non cost = Low asymmetry- firm = Small
family firm family CEO agency cost = Low family firm
asymmetry
F(1, 407) 1.77 4.47 0.23 0.20 0.36
Prob > F 0.1837 0.0351 0.6295 0.6569 0.5505
Panel B. Local legal environment and IPO underpricingb
Variables Underpricing (Relatively Good legal environment) Underpricing (Relatively Bad legal environment)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Family Firm −0.159⁎⁎ −0.089

(0.070) (0.088)
⁎⁎
Young Family Firms −0.194 −0.147
(Age ≤10) (0.088) (0.099)
Old Family Firms −0.127 −0.010
1
5
(Age > 10) (0.082) (0.112)

Family CEO −0.223 ⁎⁎⁎ −0.110
(0.071) (0.094)
Non-family CEO 0.007 −0.031
(0.109) (0.126)
⁎
High agency cost −0.166 −0.099
family firm (0.093) (0.110)
Low agency cost −0.134 ⁎ −0.084
family firm (0.080) (0.099)
⁎⁎
High info_asymmetry −0.187 −0.109
family firm (0.082) (0.112)
Low info_asymmetry −0.139 −0.114
P
a
family firm (0.084) (0.098)
cific-B
Large family firm −0.131 −0.117
(0.088) (0.101)
asinF
Small family firm −0.176⁎ −0.044
(0.101) (0.111)
ina
Agency cost −0.931 −0.946 −0.777 −0.831 0.222 −0.142 −0.247 −0.196 0.443 0.996
nceJo
(1.062) (1.067) (1.056) (1.022) (1.100) (1.479) (1.491) (1.471) (1.557) (1.300)
Info_asymmetry −0.312 −0.297 −0.272 −0.299 −0.133 0.541 0.510 0.550 0.545 0.759⁎
urn
(0.366) (0.370) (0.365) (0.363) (0.384) (0.426) (0.435) (0.425) (0.406) (0.431)
al5
−0.242 ⁎⁎⁎ −0.242 ⁎⁎⁎ −0.236 ⁎⁎⁎ −0.229⁎⁎⁎ ⁎⁎⁎
Log(assets) −0.215 −0.228 ⁎⁎⁎ −0.220⁎⁎ −0.232 ⁎⁎⁎ −0.227 ⁎⁎⁎ −0.263 ⁎⁎⁎
7(2
(0.081) (0.081) (0.081) (0.076) (0.080) (0.087) (0.088) (0.087) (0.079) (0.081)
0
Control variables Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
19
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Industry Year Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
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Table 4 (continued)
Panel B. Local legal environment and IPO underpricingb
Variables Underpricing (Relatively Good legal environment) Underpricing (Relatively Bad legal environment)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year by Industry Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Constant 5.128 ⁎⁎⁎ 5.152 ⁎⁎⁎ 5.192 ⁎⁎⁎ 5.120⁎⁎⁎ 3.054⁎⁎ 2.776⁎⁎⁎ 6.734 ⁎⁎⁎ 6.697 ⁎⁎⁎ 6.865 ⁎⁎⁎ 6.738⁎⁎⁎ 7.367⁎⁎⁎ 3.539 ⁎⁎⁎
(1.330) (1.308) (1.277) (1.210) (1.255) (0.901) (1.575) (1.600) (1.580) (1.563) (1.483) (1.096)
N 247 247 247 247 263 247 232 232 232 232 241 232
R2 0.715 0.716 0.722 0.714 0.714 0.700 0.609 0.612 0.610 0.609 0.589 0.598
Test of equality of Young Family High High Large family Young Family High High Large family
coefficients family CEO = Non agency info_asymmetry = Low firm = Small family CEO = Non agency info_asymmetry = Low firm = Small
firm = Old family CEO cost = Low info_asymmetry family firm firm = Old family CEO cost = Low info_asymmetry family firm
family firm agency cost family firm agency cost
F(1, 407) 0.48 5.17 0.09 0.27 0.14 1.40 0.39 0.02 0.00 0.38
Prob > F 0.4874 0.0241 0.7705 0.6044 0.7041 0.2377 0.5336 0.8967 0.9661 0.5407
a
This panel reports the pooled-OLS regression results for the full sample of privately owned listed companies. Columns (1) to (7) shows the results with the degree of IPO underpricing as the dependent
variable, columns (8) to (14) shows the results with market return adjusted IPO underpricing rate as the dependent variable. Definitions of variables are shown in AppendiX I. Dummy variables for old and
young family firms, family CEO and non-family CEO, high and low agency cost family firm, high and low info_asymmetry family firm, large and small family firm are for family firm sub-sample. Therefore
each pair of dummy variables are included in the regression for full sample. The mean values of agency cost, info_asymmetry, and market value of equity are used to create the dummy variables for high
and low. Numbers in parentheses are standard errors. We winsorize IPO underpricing values at the 99th percentile. Superscripts *, **, *** indicate statistical significance at 10%, 5%, and 1% levels,
respectively. White heteroscedasticity robust standard errors are reported in the parentheses. We control for year, industry, and year by industry fiXed effects.
1
6
b
This panel shows the regression results of IPO underpricing of privately owned listed companies with the samples grouped by local legal environment in China. Columns (1) to (6) shows the
regression results for firms in regions with “good” local legal environment, columns (7) to (12) shows the regression results for firms in regions with “bad” local legal environment. The annual mean of
Regional Legal Environment (index) is used to distinguish “good” regions from “bad” regions in a relative sense. We winsorize IPO underpricing values at the 99th percentile. Numbers in parentheses are
standard errors. Superscripts *, **, *** indicate statistical significance at 10%, 5%, and 1% levels, respectively. White heteroscedasticity robust standard errors are reported. We control for year, industry,
year by industry fiXed effects. Control variables are the same as in Panel A. Results on control variables are not reported for brevity. The sample is the same as in Panel A.
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relatively good legal regional environment enhances the credibility of family firms' signaling effect. However, in regions with re-
latively bad legal environments, contracts are not expected to be honored in full. Hence the protection shareholders can expect
through contracts is limited, as a result, the second type of principal-agent problem, i.e., the conflict between controlling and
minority shareholders are more severe. Investors may cast doubt on the reliability of disclosures or signals from family firms in areas
with a relatively poor legal environment because of more severe information asymmetry. As a result, the family firms may not be able
to issue IPOs at a smaller discount as their counterparts in areas with a relatively good legal environment can do. Overall the evidence
supports H3a and implies that under better legal environment, the bright-side effect of family firms outweighs the dark-side effect of
the family firms, leading to smaller IPO underpricing for family firms in regions with a better legal environment.
It is noted that in Panel B the dummy for small family firms is significantly negative at the 10% level while the dummy for large
family firms is not significant in regions with a relatively good legal environment. Given that the agency problem should be less
severe in regions with a good legal environment, this evidence seems to suggest that the information asymmetry is one of the main
source for lower IPO underpricing among family firms.
To further explore how family firm governance and legal environment affect information asymmetry and IPO underpricing, we
conduct pooled-OLS regressions for the subsample of family firms. The results are reported in Table 5. Our first interest of in-
vestigation is whether family firms with family member CEO have lower IPO underpricing than family firms with outside CEO. The
coefficient of dummy variable “Non-family CEO” is significantly positive at the 1% or 5% significance level in almost all regressions,
indicating that IPO underpricing increases if the CEO of the family firm is not from the family with the controlling interest.6 For all
cases, the IPO underpricing is >10% higher for family firms with non-family member CEO than for family firms with family member
CEO. This evidence again is consistent with Hypothesis H1a, H2a, as well as H2c. The evidence implies that external investors could
view family member CEO as a commitment of family controlling shareholder in the management of family firms whereas non-family
CEO poses uncertainty. This commitment may strengthen the credibility of the signal of family firms. Hence the IPO underpricing or
the discount required by the investors are smaller for family firms with family member CEOs.
Although non-family member CEOs may increase the agency costs and information asymmetry, family directors, on the other hand,
may alleviate the problem through strengthened monitoring. Therefore, the positive effect of non-family CEOs on IPO underpricing
should be mitigated by the increase in percentage of family member directors. To test this possibility, we include the interaction of the
non-family CEO and the percentage of family directors. The focal independent variable is the dummy variable for non-family CEOs. The
coefficient reflects how much the mean difference in IPO underpricing between the groups with non-family CEOs and the sample with
family CEOs is predicted to change given one-percent change in family directors. Column (2) of Table 5 shows that the coefficient of the
interaction of non-family CEOs and the percentage of family directors is significantly negative. The coefficient is −2.42 and is sta-
tistically significant at the 10% level, which suggests that for a 10% increase in family member directorship in a family firm, the positive
impact of non-family CEOs on IPO underpricing can be reduced by appro Ximately 24%. This part of result suggests that the positive
effect of a non-family CEO on IPO underpricing can be mitigated by the increase in the percentage of family directors. In other words,
the agency cost and the potential information asymmetry perceived by investors among firms with non-family member CEO can be
reduced by increasing the family member directorship. This validates Hypothesis H2d.
To examine the effect of the legal environment, we first control for the regional legal environment variable. The coefficient of
Regional Legal Environment is negative in all model specification at the 1% significance level. This indicates that IPO underpricing
for family firms is smaller for firms in a better regional legal environment. This evidence is consistent with Hypothesis H3a. It is
possibly because, in a good legal environment, investors view information disclosure and signals as well as family owners' monitoring
from family firms more credible. To examine how legal environments may impact the effects of family member directorships on IPO
underpricing, we include a three-way interaction (Non-family CEO * Percentage of family directors * Legal environment). The
coefficient of three-way interaction tells us how the two-way interaction parameter (for Non-family CEO * Percentage of family
directors) changes when legal environment index changes by one unit. Column (5) of Table 5 shows that the coefficient is −0.755
and it is statistically significant at the 5% level. This evidence suggests that when local legal environment index increases, the two-
way interaction of non-family CEO with the percentage of family directors further reduces. In other words, the mitigating role of the
percentage of family member directorship in reducing IPO underpricing is even stronger when the legal environment index increases.
The evidence indicates that the improvement of a regional legal environment enhances the monitoring of family directors over non-
family CEOs, which further reduces agency cost, this further supports Hypothesis H3a.Overall, the evidence from China does not
seem to be consistent with the litigation risk hypothesis for IPO underpricing with the U.S. data proposed in Lowry and Shu (2002). In
general, one would expect greater litigation risk in regions with good legal environment and in that sense, IPO underpricing should be
greater in relatively good legal environment region for insurance purpose. The evidence suggests that in emerging markets such as
China, the litigation risk may not be strong enough to induce IPO underpricing, instead the effect of information asymmetry out-
weighs the litigation risk in driving the IPO underpricing. It is expected, though, the ligation risk involving false statement and
fraudulence in IPO issuance may grow overtime as Chinese investors are increasingly aware of their bill of rights.7
6
The dummy variable “Non-family CEO,” which takes the value of 1 if the CEO of a family firm is not from the family members, is only relevant in
the sample of family firms. If we consider the full sample of both family and non-family firms, for all non-family firms, “Non-family CEO” dummy
will have a value of 1. For this reason, to examine the effect of non -family firm CEO within family firms, we focus our analysis on the family firm
sub-sample.
7
The Supreme People's Court of China adopted in December 2002 “Some Provisions on Lawsuits Involving False Statements Related to Securities
Market” The provisions stipulate the methods of litigation, definition of false statements, losses calculation, etc. Our extensive search suggests that
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Among the control variables, Market Return 30 has a positive relationship with the degree of IPO underpricing. The t-ratio of the
coefficient is at the 1% significance level. This means that when the market rate of return is high, the IPO first day rate of return is
also high. Consistent with previous results, “Ownership,” which is the proportion of controlling shareholders ownership, is positively
related to the IPO underpricing.
4.2. Sub-indexes of regional legal index
As described in Section 3, the Regional Legal Index is constructed by the weighted average of the two sub-indexes, namely,
“Protection of interests of corporation owners” and “Judicial Justice and efficiency.” Furthermore, “Protection of interests of cor-
poration owners” is the weighted average of three numerical scores on different aspects of rights protection and “Judicial Justice and
efficiency” is the weighted average of two numerical scores on fairness and efficiency of law enforcement. To examine whether one or
more particular sub-indexes may have played a more critical role in reducing agency cost and information asymmetry, we conduct
the regression analysis with sub-indexes included.
Overall, regression results8 suggest that each of the two sub-indexes of the regional legal environment index, namely “protection
of interests of corporation owners” or “judicial justice and efficiency,” is negatively correlated with the IPO underpricing of family
firms. However, the coefficients of the three-way interaction terms, namely “Non-family CEO*Percentage of family directors* pro-
tection of interests of corporation owners” and “Non-family CEO*Percentage of family directors*judicial justice and efficiency” are
not significant. This suggests that it is only the joint force of the two sub-indexes, i.e., the regional legal environment index, that
significantly impact the mitigating role of family-member CEO on the degree of IPO underpricing. Furthermore, the five numerical
scores for the two sub-indexes are not significant in the regressions. Overall, the evidence here suggests that all aspects of the local
legal environment index should be improved simultaneously to materialize the benefit of reducing agency problem and information
asymmetry.
5. Robustness
5.1. Analysis of matched samples
Family ownership may be endogenously determined and unobservable omitted firm characteristics could affect both family firm
status and IPO underpricing simultaneously. To check the robustness of our results, we conduct a matched sample analysis using
propensity score matching algorithms documented in Dehejia and Wahba (2002) and in a way similar to Lins et al. (2013). The
treatment group is the family firms. The control group is non-family firms that resembles the family firms in various firm char-
acteristics.
The first stage of estimating propensity score in logit regression is reported in Panel A of Table 6. The binary dependent variable
takes the value of 1 if a firm is a family firm and 0 otherwise. The explanatory variables include firm characteristics variables and
regional legal and economic variables that may affect the likelihood of the decision to form a family firm. Similar to Lins et al. (2013),
we include firm characteristics variables such as firm size, debt to asset ratio, quick ratio, and book-to-market. In addition, given that
firms' decision in China are affected by political and economic environment, we also include regional legal environment index, the
percentage of tertiary industry in the total GDP, local GDP per capita, local capital formation rate, local final consumption rate, local
unemployment rate, total regional output of financial industry, regional average monetary wage index, regional retail price index,
and etc. In the logistic regression, we use these factors to estimate the probability of being family firms. After the logistic regression,
the expected probability of being family firms, i.e., the propensity score, is derived based on the estimated coefficients.
We then apply the first-stage propensity estimates to match each family firm in the treatment group with a firm from a set of
companies in the control group based on the closest estimated propensity scores. In doing so, we obtain a set of control firms that
have similar characteristics to family firms. We then examine the difference in IPO underpricing between family firms and matched
control firms. There are different approaches for the selection of control groups depending on the closeness-of-match and total sample
size of control firms. The number of control firms varies depending on whether a one to one nearest neighbor is chosen or a radius
match is used in which all control firms falling within the criteria are selected. We employ both the closest neighboring match and
radius matching approach. Fig. 1 shows the propensity density map of the propensity score for family firms and matched firms. The
horizontal axis is the propensity score, and the vertical axis represents the density. The solid line represents the treated group (family
firm), and the dotted line represents the control group (matched sample). The comparison of “Raw” and “Matched” shows that the
propensity score matching generates a good match.
Panel B of Table 6 reports the regression results of IPO underpricing against the dummy for the treatment group (family firms) as
opposed to the matched sample. Family firm is the dummy variable that takes the value of 1 for family firm and 0 for the control
group. The match is the closest neighboring match (1 to 1). The first column (unadjusted) reports the simple regression results
(footnote continued)
such lawsuit on IPO market, although very rare, does occur. For example, in December 2004, a group of 23 investors, led by investor Lihua Chen,
filed lawsuit against Daqing Lianyi Company and Shenying Securities Company for their losses in their investment in the company's stocks due to the
false statement. The group of 23 investors won the lawsuit, which demanded 960,063 RMB.
8
Results are not reported for brevity.
18
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Table 5
Local legal environment and IPO underpricing – The sub-sample of family firms.
Variables Underpricing Underpricing (Market return adjusted)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
⁎⁎ ⁎⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎ ⁎⁎
Non-family CEO 0.207 0.230 0.856 0.207 0.876 0.861 0.868 0.195 0.221 0.810 0.195 0.832 0.815 0.823 ⁎⁎
(0.086) (0.088) (0.368) (0.087) (0.363) (0.368) (0.365) (0.082) (0.083) (0.363) (0.082) (0.357) (0.364) (0.360)
Legal Environment −1.289 ⁎⁎⁎ −1.357 ⁎⁎⁎ −1.303 ⁎⁎⁎ −1.304 ⁎⁎⁎ −1.358 ⁎⁎⁎ −1.285 ⁎⁎⁎ −1.318 ⁎⁎⁎ −1.307⁎⁎⁎ −1.384 ⁎⁎⁎ −1.320⁎⁎⁎ −1.327⁎⁎⁎ −1.385 ⁎⁎⁎ −1.302 ⁎⁎⁎ −1.340⁎⁎⁎
(0.494) (0.487) (0.485) (0.480) (0.480) (0.485) (0.473) (0.488) (0.479) (0.479) (0.470) (0.472) (0.479) (0.463)
Percentage of Family Directors 0.036 0.035 0.390 −0.555 0.389 0.394 −0.511 −0.010 −0.011 0.324 −0.804 0.323 0.329 −0.762
(0.421) (0.420) (0.491) (4.272) (0.490) (0.493) (4.268) (0.404) (0.403) (0.480) (4.321) (0.478) (0.481) (4.342)
Non-family CEO * Legal Environment 1.281 1.193 1.444 1.361
(1.189) (1.138) (1.118) (1.067)
Non-family CEO * Percentage of Family −2.420⁎ 2.546 −2.290⁎ 2.764
Director (1.240) (9.157) (1.233) (8.629)
Percentage of Family Director * Legal 0.186 0.286 0.250 0.344
Environment (1.307) (1.289) (1.319) (1.307)
Non-family CEO * Percentage of Family −0.755 ⁎⁎ −1.560 −0.771 ⁎⁎ −0.713 ⁎ −1.588 −0.731 ⁎
Director * Legal Environment (0.380) (2.861) (0.385) (0.377) (2.687) (0.382)
Young Family Firm −0.101 −0.088 −0.106 −0.101 −0.096 −0.109 −0.108 −0.095 −0.081 −0.100 −0.096 −0.088 −0.103 −0.102
1
9
(0.075) (0.074) (0.074) (0.074) (0.074) (0.075) (0.074) (0.072) (0.072) (0.072) (0.072) (0.072) (0.073) (0.072)
Agency cost −0.710 −0.499 −1.223 −0.704 −1.043 −1.262 −1.241 −0.754 −0.516 −1.239 −0.746 −1.030 −1.280 −1.256
(1.461) (1.416) (1.510) (1.465) (1.453) (1.497) (1.510) (1.409) (1.365) (1.467) (1.414) (1.413) (1.455) (1.469)
Info_asymmetry −0.159 −0.163 −0.120 −0.168 −0.118 −0.109 −0.128 −0.238 −0.242 −0.201 −0.250 −0.200 −0.190 −0.212
(0.320) (0.327) (0.310) (0.327) (0.316) (0.310) (0.316) (0.295) (0.301) (0.286) (0.303) (0.292) (0.286) (0.294)
Log(assets) −0.115 −0.106 −0.112 −0.115 −0.104 −0.113 −0.113 −0.113 −0.103 −0.110 −0.114 −0.101 −0.111 −0.111
(0.077) (0.076) (0.078) (0.078) (0.077) (0.078) (0.078) (0.072) (0.071) (0.073) (0.073) (0.072) (0.073) (0.073)
Control variables Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year by Industry Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Constant 6.468⁎⁎⁎ 6.493 ⁎⁎⁎ 6.251 ⁎⁎⁎ 6.646 ⁎⁎⁎ 6.252 ⁎⁎⁎ 6.202 ⁎⁎⁎ 6.497⁎⁎⁎ 6.488⁎⁎⁎ 6.517⁎⁎⁎ 6.283 ⁎⁎⁎ 6.727⁎⁎⁎ 6.289⁎⁎⁎ 6.234 ⁎⁎⁎ 6.586 ⁎⁎⁎
P
a
(1.619) (1.613) (1.594) (2.073) (1.589) (1.602) (2.059) (1.498) (1.493) (1.472) (1.963) (1.468) (1.478) (1.954)
cific-B
N 267 267 267 267 267 267 267 267 267 267 267 267 267 267
R2 0.580 0.583 0.591 0.580 0.594 0.591 0.591 0.573 0.577 0.583 0.573 0.587 0.584 0.584
asinF
This table reports the pooled OLS regression result for the subsample of family firms. Columns (1) to (7) shows the result with IPO underpricing rate as the dependent variable, columns (8) to (14) shows
ina
the result with market return adjusted IPO underpricing rate as the dependent variable. Percentage of Family Director is the proportion of family member directors in the board. We winsorize IPO
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underpricing values at the 99th percentile. Numbers in parentheses are standard errors. Superscripts *, **, *** indicate statistical significance at 10%, 5%, and 1% levels, respectively. White hetero-
u
scedasticity robust standard errors are reported. Year, industry, year by industry fiXed effects, and control variables are included as in Table 4. The sample includes all private enterprises that went IPO
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Fig. 1. Probability density map of propensity score. Raw: before matching. Matched: after matching.
without including control variables. The analysis is equivalent to a mean difference test between the treatment group and the
matched group (Imbens and Rubin 2015). The second column (adjusted) reports the regression results with the inclusion of control
variables. It amounts to a mean difference test between the treatment group and matched group after adjusting for differences in
control variables (Abadie & Imbens, 2011). The control variables are the same as in the first stage logit regression. The results show
that with (without) the inclusion of control variables, the IPO underpricing is about 12% (20%) lower for the group of family firms
than for the group of matched firms. Panel C of Table 6 reports the average treatment effect (ATE). We report both closest neighbor
matching and radius matching results. For comparison, we report both unmatched and matched results. Clearly, regardless of the
matching method, the ATEs are significantly negative at the 1% level, suggesting that the IPO underpricing is significantly smaller for
family firms (treatment group) than for matched firms from the control group. Overall, tests based on the propensity score matching
show that family firms have significantly smaller IPO underpricing than non-family firms do (Panel B of Table 6).9
5.2. Geographic location and IPO
It is possible that the legal environment is an important factor for a firm to choose a location for IPO. If so, the legal environment
and IPO underpricing may be endogenously determined. To investigate this issue, we manually searched in the companies' pro-
spectuses the geographic locations at which a company was initially founded and the place in which the company was registered at
the time of IPO. Our objective is to examine if privately held companies in China have systemically relocated to places with a certain
condition of the legal environment for the sake of IPOs. The evidence does not suggest that Chinese companies tend to endogenously
choose places based on their legal environment for the sake of IPOs.
Of the entire sample of 506 companies in our study, only four companies had relocated before IPOs.10 Among the four companies,
three of them relocated within the provinces, which had the same legal environment score. Only one company - Luolai textile with
stock code 2293 - relocated to a city in a different province. A closer examination shows that the company was founded in Shanghai in
2002. However, the IPO registration place is Nantong city, Jiangsu province. According to the company's introduction, Luolai textile
was previously a small firm in Nantong city before 2002. Therefore, the company moved back to its hometown for IPOs registration.
Overall the evidence suggests that Chinese companies are unlikely to choose the location for IPOs based on its legal environment. For
robustness check, we also conduct our tests with the four companies excluded; the results remain qualitatively the same.
We further examine the frequencies of family firms versus non-family firms across regions with different legal environments.
Results, reported in AppendiX II, shows that among family firms, 154 were located in relatively good legal environment provinces and
130 were located in relatively bad legal environment provinces. For non-family firms, 110 of them were located in relatively good
legal environment provinces, and 112 were located in relatively bad legal environment provinces. Overall, this seems to suggest that
the location for family vs. non-family firm is not systematically dependent on the legal environment of the region.
9
It is noted however, although a propensity score matching analysis helps alleviate the endogeneity bias caused by observable omitted firm
characteristics, it does not mitigate the concern that some unobservable omitted firm characteristics could spuriously drive the results.
10
The four companies are Luolai textile (2293), Green land (2200), Shengnong development (2299), Pibao Pharmaceutical (2433).
2
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Table 6
Comparison of IPO underpricing between family firms and matched samples.
Panel A: Estimating propensity scorea
Control variables (1) (2) (3) (4) (5)
Region legal environment 0.921 −0.178 −0.091 −0.216 0.756

(0.966) (1.187) (1.186) (1.219) (1.299)
Log(assets) 0.312⁎⁎ 0.229 0.210 0.191 0.168
(0.153) (0.156) (0.161) (0.167) (0.167)
Debt To Asset Ratio −2.464 ⁎⁎ −1.913 ⁎ −1.845⁎ −2.081 ⁎ −2.202 ⁎
(1.026) (1.037) (1.073) (1.113) (1.136)
Current ratio 0.416 0.467 0.406 0.408 0.391
(0.282) (0.302) (0.301) (0.325) (0.305)
Quick ratio −0.980⁎⁎⁎ −0.986⁎⁎⁎ −0.929⁎⁎⁎ −1.021 ⁎⁎⁎ −1.082 ⁎⁎⁎
(0.307) (0.328) (0.327) (0.346) (0.334)
Book to market −0.262 0.536 −0.076 −0.054 −0.152
(1.266) (1.314) (1.321) (1.387) (1.384)
Proportion of tertiary industry −0.035⁎⁎⁎ −0.078⁎⁎⁎ −0.094⁎⁎⁎ −0.068⁎⁎
(0.013) (0.023) (0.026) (0.027)
⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎
GDP per capita 2.006 3.188 4.896 3.759
(0.806) (1.008) (1.645) (1.717)
Capital formation rate −0.018 −0.034 ⁎⁎ −0.032 ⁎⁎
(0.012) (0.016) (0.016)
Final consumption rate 0.063 ⁎⁎ 0.068 ⁎⁎ 0.046
(0.032) (0.033) (0.034)
2
1
Unemployment rate −0.151 −0.163

(0.152) (0.152)
Output of financial industry −0.851 −0.946
(0.671) (0.739)
Monetary wage index −0.066
(0.044)
regional retail price index 0.107 ⁎⁎
(0.052)
Constant −7.234⁎ −10.410⁎⁎ −15.774 ⁎⁎⁎ −18.234 ⁎⁎⁎ −18.793 ⁎
(3.889) (4.102) (5.549) (6.399) (9.738)
N 477 477 477 469 466
Pseudo R 2 0.030 0.043 0.053 0.062 0.068
P
a
AUC 0.601 0.625 0.636 0.651 0.666
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p 0.003 0.000 0.000 0.000 0.000
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in
Panel B: Matched sample analysis of IPO underpricingb
a
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IPO underpricing (1) (2)
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Family firm −0.20⁎⁎ −0.12⁎⁎
19
(0.09) (0.06)
)1
Control No Yes
0
1
10
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Table 6 (continued)
Panel B: Matched sample analysis of IPO underpricingb
IPO underpricing (1) (2)
unadjusted adjusted
N 388 388
adj. R2 0.012 0.526
Panel C. Comparison of average treatment effect on treatment group (ATE).
Sample Treatment Control ATE s.e. t-value N
Closest Neighbor Matching (1:1 match)

IPO underpricing
Unmatched 0.5450 0.8429 −0.2979 0.0786 −3.79⁎⁎⁎ 466
Matched 0.6041 0.8090 −0.2048 0.0868 −2.36⁎** 388
IPO underpricing market adjusted
Unmatched 0.5422 0.8312 −0.2890 0.0770 −3.75⁎⁎⁎ 466
Matched 0.6013 0.8008 −0.1996 0.0848 −2.35⁎⁎⁎ 388
Radius matching
IPO underpricing
Unmatched 0. 5450 0.8429 −0.2979 0.0786 −3.79⁎⁎⁎ 466
2
Matched 0.5521 0.8090 −0.2568 0.0456 −5.63⁎⁎⁎ 448

2
IPO underpricing market adjusted

Unmatched 0.5422 0.8312 −0.2890 0.0770 −3.75⁎⁎⁎ 466
Matched 0.5495 0.8008 −0.2513 0.0443 −5.68⁎⁎⁎ 448
Standard errors in parentheses.

a
This panel reports the first stage of estimating propensity score in logit regression is reported. The binary dependent varia ble takes the value of 1 if a firm is a family firm and 0 otherwise. The
explanatory variables include firm characteristics, regional legal and economic variables that may affect the likelihood of forming a family firm. These variables include, for example, firm size, leverage,
current ratio, quick ratio, book-to-market, regional legal environment index, the proportion of tertiary industry in the total GDP, local GDP per capita, local capital formation rate, local final consumption
rate, local unemployment rate, total regional output of financial industry, regional average monetary wage index, regional retail price index, and etc. AUC denotes the area under the ROC curve. Column
(5) provided the best results of Pseudo-R2 and AUC. Thus the coefficients from Column (5) are used in propensity score matching. The sample includes all private enterprises that went IPO and issued ‘A'
Shares from 2007 to 2014 on the medium and small enterprises (SEM) board in the A-share main board on Shenzhen Stock EXchange.
P
acific-B
b
This Panel reports the regression results of IPO underpricing against the dummy for treatment group (family firms) as opposed to the matched sample. Family firm is the dummy variable that takes the
value of 1 for family firm and 0 for control group. The match is the closest neighboring match (1 to 1). The first column (un adjusted) reports the simple regression results without including control
asinF
variables. The analysis is equivalent to a mean difference test between treatment group and matched group (Imbens and Rubin 2015). The second column (adjusted) reports the regression results with the
inclusion of control variables. It amounts to a mean difference test between treatment group and matched group after adjusting for differences in control variables (Abadie & Imbens, 2011). The control
ina
variables are the same as in the first stage logit regression. Standard errors are reported in parentheses. The sample includes all private enterprises that went IPO and issued ‘A' Shares from 2007 to 2014
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on the medium and small enterprises (SEM) board in the A-share main board on Shenzhen Stock EXchange.
⁎
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p < 0.1.
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6. Conclusion
EXisting literature in family businesses has mainly focused on aspects related to firm valuations and the comparison of long-term
performance between family businesses and non-family businesses, and there is less attention on the performance of family busi-
nesses in a primary market. In this paper, we study how the interactions of agency problems, information asymmetry, and local legal
environment can play out in the governance role of family firms through the lens of IPO underpricing of family firms versus non-
family firms in China.
We find that on average, the IPO underpricing of the family business is lower than the non-family business by a 12.0% (or 12.6%
for market return adjusted underpricing) margin, controlling for other factors. It appears that the reduction of IPO underpricing for
family firms is economically significant. Furthermore, we find that family firms with a family-member CEO exhibit an IPO under-
pricing rate about 16–17% lower than non-family firms and family firms with a non-family CEO. This suggests that IPO underpricing
increases if the CEO of the family firm is not from the family with the controlling interest. On the other hand, family firms with a non-
family member CEO displayed no significant difference from non-family firms concerning IPO underpricing. Further tests show that
the positive effect of a non-family CEO on IPO underpricing, or in other words, the agency cost and the potential information
asymmetry perceived by investors among firms with non-family member CEO, can be mitigated by the increase in the percentage of
family member directorship.
We also find that the smaller IPO underpricing for family firms is more pronounced for firms in a better regional legal en-
vironment. Furthermore, the mitigating role of the percentage of family member directorship in reducing IPO underpricing is
stronger when the legal environment index increases. Overall, the evidence from China does not support the litigation risk hypothesis
for IPO underpricing with the U.S. data proposed in prior literature. Instead, the evidence suggests that in emerging markets such as
China, the litigation risk may not be strong enough to induce IPO underpricing, whereas the effect of information asymmetry
outweighs the litigation risk in driving the IPO underpricing. The results are consistent with the notion that good legal protection
enhances the credibility of information disclosure and reduces the verification cost for outside investors, thus possibly leading to
more effective monitoring by family owners in the eyes of investors. Therefore, in regions with a better legal environment, the bright-
side effect of family firms dominates the dark-side effect of the family firms, giving rise to smaller IPO underpricing for family firms.
Our study provides a further understanding on how family firms' bright-side and dark-side effect counteract under a different local
legal environment.
Acknowledgements
Huang acknowledges research support from China National Natural Science Foundation grant (Project #71773027), the Shidler
College of Business, University of Hawaii at Manoa, and the Center for Economics, Finance, and Management Studies at Hunan
University. Li acknowledges the National Natural Science Foundation grant for Informal Finance in China: Risks, Potential and
Transformation (Project #71661137006), and the Fundamental Research Funds for the Central Universities of China
(531107051228). Zhang acknowledges the National Natural Science Foundation grant for Informal Finance in China (Project
#71661137006).
Appendix A. Appendix I
Variable definitions and data sources
Variable Definition Data source
Underpricing The IPO rate of return on the first day of trading, the formula is: Underpricing = (Pc-P0)/P0 CSMAR database
Family Firm A dummy variable that takes a value of 1 if at least two family members hold the posts of Firms' prospectus
director, supervisor and senior manager, and 0 otherwise.
Family CEO A dummy variable that takes a value of 1 if a company's CEO is a family member and 0 Firms' prospectus
otherwise.
Non-family CEO A dummy variable that is equal to 1 if the CEO is a non-family member and 0 otherwise. Firms' prospectus
Percentage of fa- The proportion of family-member directors in the total number of Board members. Firms' prospectus
mily directors
Region Legal En- The local legal environmental index of the region where the corporation is located. Business Environment Index for China's
vironment Provinces 2013 Report (Wang et al. 2013)
Young Family Fi- Family firms that established <10 years. Firms' prospectus
rm (Age-
≤10)
Old Family Firm Family firms that established >10 years. Firms' prospectus
(Age > 10)
Ownership The proportion of the current controlling shareholders' ownership after the IPO offers are CSMAR database
issued, which amounts to the ownership possessed by controlling shareholders by way of
direct shareholding, interlocking shareholding or pyramidal shareholding, and so on.
Agency cost The ratio of managerial expenses to total assets. CSMAR database
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Venture Capital A dummy variable that takes a value of 1 if there are risk investment or venture investment CSMAR database
institutions among the top 10 shareholders before the corporation's offerings, and 0
otherwise.
Info_Asymmetry
Info_Asymmetry equals 1/ (N + 1), where N is the total number of analysts following the CSMAR database
company.
Independent di- The proportion of independent directors on the board CSMAR database
rector
Management co- The logarithm of the total amount of salary of the board members and senior management. CSMAR database
mpensation
Political connec- The dummy variable that takes the value of 1 if the controlling shareholders has political CSMAR database
tion connection and 0 otherwise.
Regional average The local average income of the region where the corporation is located. CSMAR database
income
Underwriter ran- A dummy variable that takes the value of 1 if the market shares of an IPO corporation's WIND database
k15 underwriter are ranked among the top 15.
CPA rank20 A dummy variable that takes the value of 1 if the auditing firm of the IPO corporation is WIND database
ranked among top 20 in the comprehensive evaluation of accounting firms issued by the
Chinese CPA Association in that year and 0 otherwise.
Market return 3- The accumulative rate of return on the Shanghai Stock EX change composite index for 30 days WIND database
0 days before before IPO.
IPO
Log (assets) The natural logarithm of total assets in the year before IPO was issued, which was disclosed in WIND database
the IPO corporation's prospectus.
Debt to assets ra- The asset-liability ratio in the year before IPO was issued, which was disclosed in the IPO WIND database
tio corporation's prospectus.
ROE The weighted average return on net assets the year before IPO was issued, which was WIND database
disclosed in the IPO corporation's prospectus.
Appendix B. Appendix II
The frequency of family vs. non-family firms across regions with different legal environment.
Regions with good legal environment Regions with bad legal environment
Family firms 154 130

Non-family firms 110 112
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Contents lists available at ScienceDirect

Pacific-Basin Finance Journal

Information asymmetry, legal environment, and family firm

family firms in China.

2. Literature review and hypothesis development

3.1. Sample selection and data sources

3.2. Variable definitions

3.2.1. Dependent variable

3.2.2. Independent variables for main effects

3.2.3. Control variables

3.3. Descriptive statistics

Year Number Mean SD Min Max

2007 65 2.177 1.090 0.738 5.381

4.1. Effect of family control on IPO underpricing

Panel A. IPO underpricing of family and Non-family firms a

(1) (2) (3) (4) (5) (6) (7)

Family Firm −0.133 ⁎⁎ −0.120⁎⁎

Large family firm −0.096

Panel A. IPO underpricing of family and Non-family firms a

(1) (2) (3) (4) (5) (6) (7)

CPA Rank20 −0.006 0.002 0.010 0.002 −0.002 0.031 −0.016

F(1, 407) 1.79 4.33 0.15 0.27 0.07

Panel A. IPO underpricing of family and Non-family firms a

Variables Underpricing (Market return adjusted)

(8) (9) (10) (11) (12) (13) (14)

Family Firm −0.139⁎⁎ −0.126⁎⁎

Panel A. IPO underpricing of family and Non-family firms a

Variables Underpricing (Market return adjusted)

(8) (9) (10) (11) (12) (13) (14)

(0.108) (0.111) (0.111) (0.109) (0.111) (0.112) (0.100)

Political connection 0.060 0.035 0.033 0.038 0.030 −0.004 0.007

Panel A. IPO underpricing of family and Non-family firms a

Variables Underpricing (Market return adjusted)

(8) (9) (10) (11) (12) (13) (14)

Panel B. Local legal environment and IPO underpricingb

Family Firm −0.159⁎⁎ −0.089

(Age > 10) (0.082) (0.112)

Panel B. Local legal environment and IPO underpricingb

4.2. Sub-indexes of regional legal index

5.1. Analysis of matched samples

Variables Underpricing Underpricing (Market return adjusted)

5.2. Geographic location and IPO

Panel A: Estimating propensity scorea

Control variables (1) (2) (3) (4) (5)

Region legal environment 0.921 −0.178 −0.091 −0.216 0.756

Unemployment rate −0.151 −0.163

Panel B: Matched sample analysis of IPO underpricingb

IPO underpricing (1) (2)

Panel C. Comparison of average treatment effect on treatment group (ATE).

Sample Treatment Control ATE s.e. t-value N

Closest Neighbor Matching (1:1 match)

Matched 0.5521 0.8090 −0.2568 0.0456 −5.63⁎⁎⁎ 448

IPO underpricing market adjusted

Standard errors in parentheses.

Variable definitions and data sources

Variable Definition Data source

Family firms 154 130

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