Local Policy Risk and IPO Performance

We investigate how the political landscape affects IPO underpricing. Using the concept of corporate proximity to political power, we find that local policy risk is positively related to initial aftermarket returns. Economically, our results also suggest that, ceteris paribus, a shift on the political map from an area completely opposed to the ruling party to being completely aligned translates to $12 million left on the table for the average issuer. Politically active firms successfully manage policy risk. We also demonstrate considerable heterogeneity on the impact of uncertainty emanating from the dynamic nature of the political landscape across electoral cycles, industries, states, and firm characteristics. Lastly, we document that policy risk has a substantial adverse impact on the survival of IPO issuers.