Intellectual capital disclosures and the association with first-day returns in initial public offerings

Abstract

This study examines the association between first-day returns and intellectual capital (IC) disclosure. Due to valuation difficulties, lower regulatory disclosure control and intangible properties underlying IC, we propose in the absence of sufficient disclosure ex ante uncertainty surrounding IC resources is high. Thus, we hypothesise that as IC disclosure in an initial public offering (IPO) prospectus declines, the extent of first-day returns increases. Contrary to expectations we find, based on data from a sample of 334 Singapore IPOs from 1997 to 2004 and after controlling for other signalling mechanisms, a positive association between IC disclosure and first-day returns. Additional analysis finds the positive IC disclosure/first-day return association persists across key demographic features. An array of sensitivity tests provides further support for the robustness of our main findings. Overall, our findings suggest that issuers in the Singapore IPO market may use IC disclosures as a strategic tool to complement first-day returns.