The Economic Consequences of Social Unrest: Evidence from Initial Public Offerings

Abstract

Prior research attributes negative stock market performance following episodes of social unrest to elevated uncertainty. However, social unrest does not solely increase uncertainty but separately acts to decrease investor sentiment. To determine which effect dominates, we study initial public offering (IPO) underpricing, which responds differently to changes to uncertainty and investor sentiment. Consistent with the notion that social unrest dampens investor sentiment, we find that first-day returns are lower during times of greater social unrest. Limits to arbitrage and elevated home-country bias (strong institutional frameworks) intensify (mitigate) the impact of social unrest on underpricing.