Initial Public Offering Prospectuses Research Articles

Make it easy: the effect of prospectus readability on IPO performance

PurposeUnderstanding the determinants of a corporate initial public offering (IPO) success is essential for reducing investors' valuation uncertainty when participating in share offerings. In this sense, this study contributes to the existing debate by examining IPO prospectus readability. The authors specifically investigate how clear and more informative insights into pure corporate key financial numbers can lead to a higher valuation for the company after the listing process.Design/methodology/approachThrough a sample of European IPOs, the authors employ a cross-sectional regression to test the relationship between prospectus readability through the Flesch reading ease (FRE) score and companies' market-to-book ratio at the period end date after the listing process.FindingsThe study findings show a positive impact of higher readability on the post-IPO market-to-book ratio. Thus, clear and more informative communication results in stocks being traded at a premium to their book value. This study presents a concrete call for firms to increase corporate documents’ readability to mitigate the risk of withdrawing or spoiling corporate market access. Specifically, enhanced clarity and transparency increase investors' confidence, facilitating a better understanding of companies' intrinsic value and the overall IPO process. The authors conducted several tests to validate the results.Originality/valueTo the best of the authors’ knowledge, this is among the first works to explore the relationship between the readability of corporate prospectus and the sustained IPO success in the European context.

COVID-19: the impact of the pandemic fear on IPO underpricing

PurposeThe purpose of this study is to assess how the information disclosed in prospectuses impacted the initial public offering (IPO) underpricing at a time of high government interference amid the ongoing pandemic.Design/methodology/approachThe design of this study has several tracks, namely, a macro-level track, which is represented by the government measures to halt the pandemic; a micro-level track, which is followed by textual analysis of IPO prospectuses; and, finally, a machine learning track, in which the authors use state-of-the-art tools to improve their linear regression model.FindingsThe authors found that strict government anti-COVID-19 measures indeed contribute to the reduction of the IPO underpricing. Interestingly, the mere fact of such measures taking place is enough to take effect on financial markets, regardless of the resulting efficiency of such measures. At the micro-level, the authors show that prospectus sentiments and their significance differ across prospectus sections. Using linear regression and machine learning models, the authors find robust evidence that such sections as “Risk factors”, “Prospectus summary”, “Financial Information” and “Business” play a crucial role in explaining the underpricing. Their effect is different, namely, it turns out that the more negative “Risk factors” and “Financial Information” sentiment, the higher the resulting underpricing. Conversely, the more positive “Prospectus summary” and “Business” sentiments appear, the lower the resulting underpricing is. In addition, we used machine learning methods. Consisting of more than 580 IPO prospectuses, the study sample required modern and powerful machine learning tools like Isolation Forest for pre-processing or Random Forest Regressor and Light Gradient Boosting Model for modelling purposes, which enabled the authors to gain better results compared to the classic linear regression model.Originality/valueAt the micro level, this study is not confined to 2020, but also embraces 2021, the year of the record number of IPOs held. Moreover, in this paper, these were prospectuses that served as a source of management sentiment. In addition, the authors used a tailor-made government stringency index. At the micro level, basing the study on behavioural finance hypotheses, the authors conducted both separate and holistic analysis of prospectuses to assess investors’ reaction to different aspects of IPO companies as well as to the characteristics of the IPOs themselves. Lastly, the authors introduced a few innovations to the research methodology. Textual analysis was conducted on a corpus of prospectuses included in a study sample. However, the authors did not use pre-trained dictionaries, but instead opted for FLAIR, a modern open-source framework for natural language processing.

Does disclosure of earnings forecasts regulation affect the valuation of IPOs? Evidence from an emerging country

PurposeThis paper aimed to explore the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian initial public offerings (IPOs).Design/methodology/approachThe study employed ordinary least square (OLS) regression and quantile regression to analyse the impact of disclosure of earnings forecasts regulation on the valuation of IPOs which comprised 458 IPOs reported for the period 2000–2017 on Bursa Malaysia.FindingsThis paper revealed that the regulatory change in forecasted earnings disclosure from a mandatory to a voluntary regime, effective from 1 February 2008, had a negative impact on the valuation of IPOs. The regime change did not improve the transparency of firms issuing IPOs. In fact, the absence of forecasted earnings information in most IPO prospectuses caused ex ante uncertainties to increase. Voluntary disclosure, however, had a significant positive relationship with the valuation of the IPOs issued during the global financial crisis period (2008–2010). Firms concealed their poor qualities by excluding forecasted earnings information from their prospectuses in order to have a fair valuation.Practical implicationsThe findings may be used by policymakers as guidance in improving the existing regulation regarding the disclosure of forecasted earnings.Originality/valueThis paper provides new insight on the effect of a regulatory change pertaining to earnings forecasts disclosure from a mandatory to a voluntary regime on the valuation of Malaysian IPOs. It also provides evidence that the regulatory change of earnings forecast disclosure affects the IPOs' values listed during the global financial crisis period.

Impact of Quality of Involvement of VC/PE in IPO Firms: Evidence from India

This article draws its primary motivation from the steady rise in the participation and involvement of venture capital/private equity (VC/PE) funds in the Indian IPO market over the last couple of decades. The study explores the involvement quality of the VC/PE managers and its impact on the long-run equity and operating performance of Indian firms issuing securities through initial public offerings (IPOs). Using data for 173 IPOs backed by VC/PE funding (out of a total of 625 IPOs) from 2000 to 2016, the authors show that post-issue, both equity market performance and operating performance of these VC/PE-backed IPOs are unimpressive in general. The information asymmetry, mispricing, and “timing the market” do not seem to be reasons for such long-term underperformance. The authors argue that it may be a case of too much money chasing too few winners in the Indian VC/PE-backed IPO market. The study utilizes a unique, hand-collected data set (from IPO prospectuses) on VC/PE firms’ involvement quality. Findings indicate that the duration and the size of the stake that the VC/PE firms hold in the pre-issue period positively affect the post-issue performance of IPOs. These findings lend support to the previously theorized “monitoring” and “certification” role of VC/PE firms. <b>Key Findings</b> ▪ Both long-term market and operating performance of VC/PE-backed IPOs in India from 2000 to 2016 were unimpressive. ▪ The quality of VC/PE involvement has some impact on the post-IPO performance of investee firms. ▪ The VC/PE-backed IPOs are not engaged in timing (hot and cold periods) the market.

Determinants of corporate tone in an initial public offering: Powerful CEOs versus well-functioning boards

Recent literature on initial public offerings (IPOs) suggests a significant effect of tone in IPO underpricing but ignores its determinants. This study concentrates on the factors that shape the tone of the information disclosed in IPOs. Sampling 211 Latin American IPOs during the period 2000–2019, we find empirical evidence that a powerful CEO can influence tone, avoiding unfavorable tone and fostering the use of positive words in the information disclosed to the market. We also show that more independent boards tend to use more unfavorable tones. Additionally, we find a non-monotonic relationship between board size and the tone in the prospectus, which suggests that an optimal board size mitigates the excessive use of positive tone and leads to more unfavorable tones in the IPO prospectus. Overall, well-functioning boards counterbalance powerful CEOs and generate more realistic disclosure to the market. Finally, we find that market-dominant auditors, age of the issuing firm, proposed use of proceeds, and the number of risk factors significantly affect the tone in the information disclosed.

IPO-Audit Expertise, Audit Quality, and Capital Allocation Efficiency: Evidence from China

Backed by China's economic growth, the initial public offering (IPO) market in China has been one of the most vigorous in the world. In this market, practicing auditors routinely sit on the regulatory committee responsible for screening prospective IPO firms. Against this backdrop, we examine whether IPO-audit expertise can influence IPO-audit quality and capital allocation. We find that auditors with richer IPO-audit experience improve the quality of earnings in IPO prospectus, earn an audit fee premium, and are significantly more likely to be assigned to IPO engagements by audit firms or appointed to the regulatory committee by regulators. We also show that, by enhancing the credibility of information disclosure in IPO prospectus, IPO exper-tise of the regulatory committee members and the IPO engagement auditors improves capital allocation efficiency. Collectively, our evidence implies that a more sophisticated audit profes-sion can contribute to the development of capital market in a country.

CSR Spendings of Indonesia's IPO Prospectuses

To raise large amounts of capital, companies usually conduct Initial Public Offerings (IPOs), which allows them to reach large numbers of potential investors. Prospectuses are used to inform the public of the nature and prospects of these offers. The prospectus contains financial and non-financial information such as Corporate Social Responsibility (CSR) spending. However, the level of disclosure is usually not uniform across companies. This study examines the nature and factors influencing CSR spendings disclosed by Indonesian companies in the prospectuses for the period 2012 - 2019. Research data was hand-collected and analyzed using descriptive statistics, Pearson correlations, and multiple regressions. The findings show that most companies disclose CSR efforts; fewer companies reveal the amount spent on CSR activities. Among companies disclosing CSR spending, more spending is allocated in the years leading to the IPO date (y) compared to previous years. Thus spending on y is relatively higher than y-1, follows by y-2 and y-3. CRS spending has a positive and significant relationship with company size. These findings are consistent across alternative model specifications. This study made an essential contribution to the CSR literature by providing Indonesia's first empirical evidence on the CSR expenditure in IPO prospectuses. DOI : https://doi.org/10.26905/jkdp.v25i2.5559

Do IPO Firms Misclassify Expenses? Implications for IPO Price Formation and Post-IPO Stock Performance

This study investigates whether initial public offering (IPO) firms inflate “core” earnings through classification shifting (i.e., misclassifying core expenses as income-decreasing special items) immediately prior to IPOs. We provide initial evidence that IPO firms engage in classification shifting in the pre-IPO period. Using hand-collected price and share information from IPO prospectuses, we find that pre-IPO classification shifting is positively associated with a price revision from the midpoint of the initial price range to the final offer price, suggesting that pre-IPO classification shifting influences IPO price formation. Furthermore, we find that pre-IPO classification shifting is negatively associated with post-IPO stock returns. Overall, our findings caution investors, auditors, and regulators that classification shifting, a seemingly innocuous accounting maneuver, can mislead investors in their IPO valuation and is associated with post-IPO underperformance. This paper was accepted by Brian Bushee, accounting.

Corporate governance and earnings forecast accuracy in IPO prospectuses: an empirical analysis

PurposeThe purpose of this study is to present an extension to the research area dealing with the Tunisia initial public offering (IPO) associated earnings management forecasts, by an examination of the corporate governance mechanisms and earnings forecast accuracy relating impacts.Design/methodology/approachThe authors use a multiple regression technique (FGLS) to estimate the effect of corporate governance structures and audit quality on earnings forecast accuracy. A sample of 33 IPO companies (165 firm-year observations) collected over the period ranging between 2011 and 2015 was applied.FindingsThe finding of this study reveals that the companies displaying a respectable audit committee size have a significant level of earnings forecast accuracy. Similarly, the accuracy level associated with IPO earnings forecasts is positively influenced by the use of the brand-name auditor.Research limitations/implicationsThis study is based on a small sample from a single jurisdiction and limited time period. In fact, the findings examine how financial statements are measured and reported and assess additional regulation to protect investors and understand as well as manage earnings forecast accuracy in IPO prospectuses.Practical implicationsThe findings of the study provide some implications for regulators, financial analysts, investors and users of financial statements, particularly who are investigating in potentially IPO firms. This study has an implication for market regulators who suggest that a requirement to publish very detailed forecast information would improve market efficiency by reducing the forecast error.Originality/valuePrevious studies on this subject carried out in other countries with a regulatory framework differ from that of Tunisia, which obligatorily obliges the publication of the forecasts in the prospectus of IPO and capital increase. This is one of the most important studies that simultaneously tests the impacts of corporate governance and audit quality on earnings forecast accuracy in an emerging market, and the results of this study may give strength to Tunisian as well as other developing countries.

IPO information acquisition and investor protection

PurposeThe purpose of this study is to examine investors’ intention and behavior concerning ex ante information acquirement and ex post claims from the micro-level perspective with the deepening of the initial public offering (IPO) reform of China.Design/methodology/approachThe authors made surveys and collected 932 valid questionnaires from investors in China. The authors also conducted interviews with sophisticated investors, investment bankers and government regulators to obtain first-hand information. Based on the survey results, the authors make the empirical analysis.FindingsInvestors’ attention to the first-hand information of the IPO prospectuses is inadequate. Individuals rely more on second-hand information, while institutions conduct more surveys. The higher the institutional practitioners’ degree of education, the more surveys they make. Only 1/3 investors intend to seek judicial remedy when getting fraud information due to high litigation costs and proof collecting difficulties. The investors who read more about prospectuses in advance are more likely to seek judicial protection afterwards. Compared with investors who know less about government administrative protection measures, those who know more have a low probability to choose “not to seek judicial protection.”Originality/valueThe authors enrich the research studies of IPO information acquisition and investor protection by conducting surveys to get first-hand data. Previous literature mostly makes empirical tests by using proxy variables.

Does board gender diversity influence voluntary disclosure of intellectual capital in initial public offering prospectuses? Evidence from China

AbstractResearch question/issueUsing a multitheoretic view of boards, this study examines the impact of boardroom gender diversity (BGD) on voluntary intellectual capital (IC) disclosure in initial public offering (IPO) prospectuses in China—the world's second‐biggest economy, which is moving from a planned economy to a market‐oriented one. Furthermore, this study also investigates the impact of family ownership on the relationship between BGD and IC disclosure in the Chinese environment, which is characterized by less‐developed corporate governance mechanisms.Research findings/insightsBased on a comprehensive content analysis of Chinese IPO prospectuses between 2009 and 2017 and measuring disclosure index at 78 dimensions under six broad categories of IC, the empirical results document (a) a significant positive relation between BGD and IC disclosure—in line with resource dependence theory, (b) a significant negative impact of female independent directors on IC disclosure—opposite to agency theory predictions, and that (c) the BGD–IC disclosure relationship is generally stronger for firms with two or more women on boards—in line with critical mass theory in China. Finally, this study also reveals that family ownership has adverse impacts on the BGD–IC disclosure relationship. These results are robust to a battery of sensitivity analyses.Practitioner/policy implicationsThis study provides positive capital market implications of BGD through enhanced IC disclosure in IPO prospectuses. In doing so, the study has important implications for regulators and top management teams in devising policies concerning female representation on boards and voluntary disclosure of IC to inform the market participants of the true value of the company.

Does IPO prospectus in Malaysia disclose relevant risk?

PurposeThe study intends to shed lights on whether the risk factors disclosed in the initial public offering (IPO) prospectus in Malaysia are able to reflect the actual risks of stocks once they are traded on the exchange. In other words, the purpose of this paper is to explore whether prospective investors will be able to benefit, in terms of the more accurate risk information, from the risk disclosures in the IPO-prospectus.Design/methodology/approachUsing data obtained from 118 IPO prospectuses of Malaysian companies that issued shares on Bursa Malaysia in the period from 2009 to 2016, the authors investigated whether the “risk factor” section in the IPO prospectuses provides sufficient risk-relevant information to investors. To determine whether companies disclose risk-relevant information, a detailed content analysis of the risk sections was carried out to obtain an aggregate measure of risk disclosure.FindingsThe findings revealed that the aggregate measures of risk extracted from these texts did not successfully predict the following outcomes: the volatility of companies’ future stock prices, the sensitivity of future stock prices to market-wide fluctuations and the severe declines in future stock prices.Practical implicationsAs indicated by the findings, the authors, therefore, deduce that the IPO prospectuses of Malaysian companies do not provide sufficient risk-relevant information in the risk factor section. The findings imply that overall the management of Malaysian companies would neither be able nor willing to disclose the right and relevant information to the public via IPO prospectus.Originality/valueMany corporate risk disclosure studies focus primarily on the disclosures of annual reports of companies. The study intends to fill the gap by focusing on the risk disclosure in the IPO-prospectus. Risk disclosures in IPO-prospectus are farmore extensive than annual reports and, therefore, provide a richness of information that will not be available in the annual reports.

Board characteristics and earnings forecasts accuracy in IPO prospectuses

Abstract Using a sample of 104 companies that conducted initial public offering (IPO) on the Warsaw Stock Exchange between 2006 and 2016, we investigated the relationship between the accuracy and bias of the earnings forecast disclosed in the IPO prospectus and the firm corporate governance attributes. Applying multiple Ordinary Least Squares (OLS) regressions models, we focused on the role of the board size, the percentage of women on the board, the board age diversity measure, and the proportion of shares owned by the members of the board. Generally, our findings show that some characteristics of management and supervisory board improve the usefulness of earnings forecasts’ credibility. Especially, a more diversified board in terms of age and higher management ownership results in more accurate forecasts. This is the first study giving an insight into the role of supervisory and management board characteristics on precision of earnings forecasts revealed in the prospectus by Polish IPO companies.

How does dependence on key employees matter for initial public offerings of U.S. high-tech firms?

Human capital is a key component of the resource base of the firm, particularly in high-tech entrepreneurial firms. In the initial public offering (IPO) context, the IPO firm sometimes identifies individual key employees because the IPO firm is dependent on the services of those employees. However, research is limited on determining the impact of such employee dependence on firm IPO performance. Using a sample of U.S. high-tech firms, we show that the IPO firm's performance is lower when the IPO prospectus discloses such dependence. Among firms with such disclosures, long-tenured executives increase IPO performance. In addition, the effects of long-tenured executives are stronger when multiple key employees are identified in the IPO firm.

Family involvement signals in initial public offerings

Utilizing signaling theory, this study examines the relationship between signals of family involvement (i.e., family ownership and management) and the performance of firms undergoing an initial public offering (IPO). Specifically, we argue that firms using family-oriented language in their IPO prospectus results in greater IPO underpricing due to the misalignment between IPO investors’ general perceptions of family business and their expectations for the IPO. Additionally, we argue that this misalignment is more pronounced for firms in high-tech industries, which are commonly more risk- and growth-oriented. Using a sample of 155 U.S.-based firms that made their IPO between 2009 and 2012, we find support for our hypotheses. Overall, our findings demonstrate that more observable signals of family involvement in an IPO may negatively influence IPO performance, particularly in high-tech industries.

Governance, Sentiment Analysis and IPO Underpricing

Research Question/Issue: What is the relationship between governance, tone in language and underpricing of initial public offerings (IPOs) in Latin America. Research Findings/Insights: First, we find empirical evidence for the link between uncertainty in tone in the IPO prospectus and the level of underpricing. Second, we do not find that governance provisions at the country level explain IPO underpricing. Third, governance mechanisms at the firm level, such as board size and independence, are significant in explaining underpricing. Fourth, when interacting with uncertainty in tone, corporate governance variables at the firm level display stronger (board size) or weaker (board independence) marginal effects. Finally, we find lower levels of underpricing for family firms compared to non-family firms. Theoretical/Academic Implications: Bigger boards seem to lead to greater underpricing while more independent boards mitigate it. This finding stresses the relevance of functional convergence in regions with weak institutions. Our results also suggest that tone in communications matter more for underpricing than governance. We argue that this could be due to the minimum corporate governance provisions at the firm level that firms need to meet before going public. Practitioner/Policy Implications: Our results suggest that tone in firm communications is relevant for market valuation. In the context of family firms, we show that reputation effect is priced by the market valuation of the IPO.

Non-GAAP Earnings Disclosure and IPO Pricing

The disclosure of non-GAAP earnings measures is increasingly common among firms undergoing initial public offerings (IPOs). However, the influence of this disclosure practice on IPO price formation is largely unexplored. We address this issue by investigating the underlying determinants of non-GAAP disclosure in IPO prospectuses and the effect of these metrics on asymmetric uncertainty and partial price adjustment in the IPO process. Using a sample of 696 book-built IPOs completed between 2003 and 2012, we find that firms disclosing non-GAAP earnings figures exclude an economically significant amount of income statement line items in calculating their non-GAAP earnings figures. Our manual inspection of IPO prospectuses reveals that the majority of these exclusions pertain to recurring expenses. We find that the disclosure of non-GAAP earnings in IPO filings is largely influenced by (1) GAAP-based operating performance, (2) industry-peer effects, (3) litigation risk, (4) the presence of venture funding, and (5) the use of non-GAAP metrics in debt covenants. Our pricing tests indicate that the earnings adjustments contained in non-GAAP prospectuses are positively associated with asymmetric uncertainty as proxied by IPO underpricing and post-issue return volatility. Underwriters tend to lowball the initial price estimates of non-GAAP IPOs (especially when issuers exclude recurring expenses), followed by under-adjustment of the offer price after book building. Additional analyses suggest that this under-adjustment reflects agency conflicts between issuers and underwriters. Lastly, we find evidence that, while some firms use non-GAAP disclosures to mitigate underpricing and lowballing, others act aggressively in their disclosure practices.

An empirical investigation into the impact of Shari’ah-compliant status and Muslim directorship on the accuracy of IPO management earnings forecasts

PurposeIslam stresses on the practice of transparency and sufficient disclosure particularly when it concerns the ethical identity of Islamic institutions. This is to make sure that the activities conducted in business adhere to Shari’ah principles. The purpose of this paper is to examine the impact of Shari’ah-compliant status on the accuracy of initial public offering (IPO) earnings forecasts and to investigate the effect of the existence of Muslim directors on IPO companies’ board of directors on the accuracy of earnings forecasts.Design/methodology/approachThis study makes use of absolute forecast error as a proxy for earnings forecast accuracy. As obtained from the list of Shari’ah-compliant securities established by the Shari’ah Advisory Council of the Malaysian Securities Commission, the study sample comprised 190 Shari’ah-compliant and non-compliant IPOs. The collected data were analyzed through univariate analysis and ordinary least squares regression.FindingsThe initial findings show that during the study period, the earnings forecasts of Malaysian IPOs are accurate to some level, although such level is still unsatisfactory. The findings also showed that Shari’ah-compliant status and Muslim directorship do not positively affect the accuracy of IPO earnings forecasts.Practical implicationsThe findings of the study provide some implications for regulators, financial analysts, investors and users of financial statements, particularly those desirous of investing in Islamic capital market.Originality/valueThe present study provides a new and far-reaching contribution into the debate about the earnings forecasts disclosure in the context of Islamic ethical perspective. In addition, this study is considered as the first study to extend IPO literature by examining the impact of Shari’ah-compliant status and Muslim directorship on the accuracy of management earnings forecasts disclosed in the IPO prospectus.

Voluntary Disclosure and Firm Visibility: Evidence From Firms Pursuing an Initial Public Offering

We draw on Merton (1987) to develop predictions for the benefits of voluntary disclosures made by firms pursuing an initial public offering (IPO) prior to providing regulated financial information via an IPO prospectus. For our sample of IPOs, we find that voluntarily issuing press releases and attending investor and industry conferences prior to filing the IPO prospectus are common disclosure activities. Consistent with Merton (1987), we find that pre-prospectus disclosures are positively associated with IPO pricing, EDGAR search activity by prospective investors, and coverage from information intermediaries during the IPO filing period. On the other hand, we find no empirical relation between pre-prospectus disclosures and adverse selection costs immediately following the offering. Our evidence suggests that pre-prospectus voluntary disclosures benefit firms by enhancing visibility with prospective investors and information intermediaries.

Going concern opinions and IPO pricing accuracy

In a marked shift, it has become relatively more common for ordinary initial public offerings (IPOs) to contain going concern opinions (GCOs) in their offering documents. Examining the implications of such GCOs for IPO investors in a sample of ordinary IPOs from 2001 to 2012, we find that GCOs increase price accuracy by reducing price revisions and underpricing. Further, we show that GCO IPOs with reputable underwriters experience higher price revisions. Our underpricing analysis supports the lawsuit avoidance theory. We also provide novel evidence that the market can distinguish between temporarily constrained GCO IPOs and those with persistent problems that receive a second GCO post-IPO. Overall, this paper contributes to the existing literature by shedding light on whether GCOs contained in IPO prospectuses provide material information and result in better pricing mechanisms.