Publication Type

Journal Article

Version

publishedVersion

Publication Date

6-2019

Abstract

Research Summary: Extant research has largely ignored if and how product diversification strategy influences IPO performance. We intend to fill this gap in the literature, especially in relation to transition economies where the role of diversification is institutionally bound. Specifically, drawing on the strategic actions and political connections arguments, we contend that the level of a firm's product diversification has a positive relationship with IPO underpricing. Given the prominent role of business groups in shaping firms' diversification strategies in transition economy, we further examine whether business groups' nonmarket capital-political, relational, and reputational capital-moderates the relationship between product diversification strategy and IPO underpricing. Managerial Summary: Due to the lack of transparency, investors in transition economies face higher ex ante uncertainties and have to bear more investment risks. As such, IPO firms have to "leave more money on the table" to compensate investors. This study aims to answer the question of whether and how an IPO firm's corporate strategy and business group affiliation affect investors' perceived uncertainties and, thus, the need to leave a large amount of money on the table to compensate investors. Using a sample of IPO firms in China, this study finds that the nonmarket capital that stems from business group affiliation helps mitigate the uncertainties investors perceive with higher levels of diversification, thus reducing the need for IPO firms to discount their offerings too much so that they can retain more wealth for business development.

Keywords

Business group; Institutional embeddedness; IPO underpricing; Political connections; Product diversification; Transition economies

Discipline

Business | Business and Corporate Communications

Research Areas

Strategy and Organisation

Publication

Strategic Entrepreneurship Journal

Volume

13

Issue

2

First Page

179

Last Page

198

ISSN

1932-4391

Identifier

10.1002/sej.1297

Publisher

Wiley

Additional URL

https://doi.org/10.1002/sej.1297

Share

COinS