Greater partisan alignment among lawmakers enhances their ability to respond rapidly to adverse shocks, but it also undermines the quality of checks and balances and encourages excessive governmental intervention in local areas aligned with the ruling party. We investigate how this form of local policy risk affects IPO underpricing. One standard-deviation increase in political alignment between local politicians and the federal government translates into an extra $1.58 million being left on the table, which corresponds to 5.39% of the average valuation discount. This effect is concentrated in firms that are vulnerable to legislative interventions and has important long-term implications. Our robustness analysis also shows that our baseline results are not sensitive to the inclusion/exclusion of influential states and years with high IPO activity.

This study tests the proposition that higher tournament incentives play a major role in lowering the failure risk of Initial Public Offerings (IPOs). Measuring tournament incentives as the pay gap between the CEO and its subordinate executives, we find that an interquartile change in the distribution of the CEO pay gap translates into a decline in failure risk probability by approximately 27%. The results are driven by the long-term rather than the short-term component of exective pay. Our results hold in an instrumental-variable setting that exploits exogenous variation in the likelihood of employing intra-firm, tournament-based, promotion incentives. Cross-sectional tests indicate that the negative link between tournament incentives and IPO failure is more pronounced when internal promotion contests are more likely to occur. Finally, we document that CEO pay gap is associated with superior long-run operating performance and greater investment efficiency.