Does Prospectus Readability Affect IPO Underpricing

Abstract

This paper takes 822 prospectuses as the textual analysis object, and constructs the readability index of Chinese financial text. From the perspectives of impression management and information asymmetry, we conduct the first empirical analysis on the impact of the readability of prospectus text on IPO underpricing. We find that prospectus readability has a significantly negative correlation with IPO underpricing. More specifically: in the sample group of high institutional investors, prospectus readability can effectively reduce the degree of IPO underpricing. From the perspective of property right, prospectus readability is negatively correlated with IPO underpricing only in the sample group of non-state-owned enterprises. At the same time, prospectus readability is negatively related to the IPO first-day turnover rate, that is, the higher the prospectus readability, the lower the degree of disagreement among investors; the lower the prospectus readability, the worse the financial performance of the IPO company after its listing. The result shows that the obscure prospectus makes managers effectively achieve the company’s impression management objectives. By reducing the ability and quantity of investors to extract information extracted from the prospectus, the degree of information asymmetry between the issuer and the investor is affected, and the IPO underpricing level is improved to some extent. The professional investors and property right will affect the mechanism of prospectus readability on IPO underpricing.The prospectus with poor readability increases the cost of investors’ information processing, and deepens the information asymmetry between investors and issuers in a short period of time. However, the market will eventually identify the true quality of the listed company, and the complex information in the prospectus will not play a deceptive role. The management’s information disclosure strategy for impression management gradually fails. This study broadens the scope of Chinese financial text analysis, and further enriches the relevant research on IPO underpricing from the perspective of information disclosure.