The political nature of underpricing is further supported by our finding of higher underpricing in countries with greater income inequality. This indicates governments are using underpricing to attract the support of median-class voters. Summary This study examines the objectives of SIPs as expressed in the choice of offering terms. We document that SIP offers have share allocation, offer pricing and control allocation terms that are consistent with governments structuring offers to achieve political objectives. Most SIPs have explicitly political features, such as preferential share allocations to domestic investors and employees, despite the fact that the offers are underpriced and oversubscribed.
Governments invariably choose a local investment banker as the lead or co-lead underwriter.
The issues are generally sold in large part through fixed prices set in advance rather than through competitive tender offers. Furthermore, the governments initiating SIPs often retain restrictions over certain management decisions. We also examine the determinants of underpricing in initial SIPs. We find little evidence that proxies for asymmetric information about the value of the SOE s assets have explanatory power in underpricing. Instead, we document that this underpricing is due to the tendency of governments to trade off sales proceeds to achieve share allocations and control restrictions that reflect political and economic policy objectives.