Relationship between management quality and IPO underpricing

This paper tests the relationship between management quality and IPO underpricing. The sample contains 1,202 firms went IPO during 2004 to 2014 in United States. To obtain management quality data, I studied the prospectus (S-1) of each firm and focus on the management section. I derive education and work experience data from it using programming technics. I counted the number of manager who studied in top business school or had superior past work experience to decide the management quality of each IPO firm, then I test the relationship between management quality and underpricing and found them negatively correlated. When I test all the industries all together, only education is negatively significant, indicating better educational background for manager helps reduce the information asymmetry therefore lowers underpricing. The reason why variable COM associated with past work experience is not statistically significant may be the inappropriateness of the top company list which varies across industries and not applicable to all the firms. To remedy this issue, I create specific top company list for that industry. Here I use technology associated industry for example, I found that in this industry past work experience is significant rather than education. This is not surprising for technology firms since it requires much knowledge that you cannot learn in school. In short, the information asymmetry caused the underpricing phenomenon in equity market. Better management quality signals good company to investors, reduces information asymmetry therefore lowers underpricing. This result is coherent with previous literatures and serve as another evidence for this theory