Abstract
While categorical ambiguity impacts negatively firm value in some research, others estimate that congruence with evaluators’ theory of value matters more than prima facie categorical ambiguity. This paper addresses these theoretical and empirical puzzles in a novel fashion, using linguistic patterns of 2930 firms going public and all institutional investors in the US from 1996 to 2015. In isolation, we find as expected that (1) as the linguistic information contained in IPO prospectus is categorically ambiguous, the IPO’s stock return on the first day of trading (underpricing) is lower; and (2) the linguistic congruence of an IPO across institutional investors (average consensus across theories of value and variation in consensus) increases underpricing. When combined, the direct effect of categorical ambiguity dissipates, suggesting the prevalence of the theory of value arguments over categorization based on prototypes. We discuss the theoretical implications of these findings for research on market categories, firm valuation, and language using big data.
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