Uncertainty and IPO initial returns: Evidence from the Tone Analysis of China’s IPO Prospectuses

Abstract

IPO prospectuses play an irreplaceable role in the IPO process. The tone of IPO prospectuses, in terms of its definitiveness in characterizing the prospects and assessing the risks of different firms, could affect investors' capability to estimate the firms that are about to go public. In a large sample of 1320 IPO prospectuses of China's A-share market from 2007 to 2016, we find that uncertain or negative tone of IPO prospectuses is significantly associated with IPO initial returns and the post-IPO return volatility. Besides, empirical evidence shows that the negative or uncertain tone in the prospectuses lowers the stocks' long-term returns. Our findings contribute to the literature by investigating the impact of connotative information transmission on stock returns during IPO process, based on which investors can do a better job in risk management.