Abstract
AbstractCompanies issuing stocks through an initial public offering (IPO) are obligated to publish relevant information as part of a prospectus. Besides quantitative figures from accounting, this document also contains qualitative information in the form of text. In this chapter, we analyze how sentiment in the prospectus influences future stock returns. In addition, we investigate the impact of pre-IPO sentiment in financial announcements on first-day returns. The results of our empirical analyses using 572 IPOs from US companies suggest a negative link between words linked to uncertainty and future stock market returns for up to 10 trading days. Conversely, we find that uncertainty expressed in pre-IPO announcements is positively linked to first-day stock returns. These insights have implications for research on IPOs by demonstrating that future stock returns are also driven by textual information from the prospectus and assist investors in placing their orders.
Highlights
Companies are increasingly turning to stock markets to raise expansion capital to monetize the investments of early private investors
Before shares of a company are sold to the general public on a security exchange for the first time, regulatory publication requirements force US firms to file an initial public offering prospectus
Studying the information processing of investors facing these filings is an active research question in the context of efficient electronic markets, though knowledge is rare (e.g., Liebmann et al 2012): “While the accounting numbers in initial public offering (IPO) prospectuses are closely studied by investors, analysts, and others involved in the equity issuance process, an examination of the textual or soft information contained in prospectuses is less common” (Ferris et al 2013)
Summary
Companies are increasingly turning to stock markets to raise expansion capital to monetize the investments of early private investors. An initial public offering (IPO) refers to a type of public offering where shares of stock in a company are sold to the general public, for the first time, on a securities exchange. As a result of regulatory publication requirements, firms must file a prospectus with, e.g., the Securities and Exchange Commission (SEC) in the USA prior to its initial public stock offering (c.f. Kenney and Patton 2013a, Ritter and Welch 2002). Details of the proposed offering are disclosed to potential purchasers in the form of a detailed document known as a prospectus. This prospectus contains key figures from financial accounting, as well as information on current and future business
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