IPO Prospectuses Research Articles

Diversity on management and supervisory board and accuracy of management earnings forecasts in IPO prospectuses

Motivation: Although the issue of accuracy and bias of earnings forecasts revealed in the IPO prospectuses has attracted attention of many researchers, the literature on the relationship between board characteristics and the quality of such financial projections is still very limited, especially for a two-tier board structure consisting of the management and the supervisory board. The policy of diversity on the boardroom is promoted in many countries and composition of the management and supervisory boards is expected to be comprehensive and diverse, among others, in terms of gender, education, age and professional experience of the members. Aim: The main objective of this study is to analyse the relationship between the accuracy of the earnings forecast disclosed in the IPO prospectus and the diversity of company’s corporate governance institutions. More specifically, we ask a question whether the extent of diversity in the board system features may have an impact on the accuracy of such forward-looking financial information. Results: Using a sample of 104 IPOs from the Warsaw Stock Exchange, we find that certain characteristics of the management and supervisory board enhance the usefulness of forward-looking financial information from a IPO prospectus, as some of boards characteristics are important for the evaluation of the earnings forecasts credibility at the time of IPO. For example, in accordance with our expectations, the age diversity results in more accurate forecasts. This evidence may be seen as an argument

The IPO corporate social responsibility information disclosure: Does the stock market care?

AbstractWe create textual information indices using corporate social responsibility (CSR) information extracted from IPO prospectuses in China. We use the indices to measure the issuers’ corporate social performance (CSP) and corporate environmental performance (CEP) and assess how the stock market reacts. We find that CSP disclosure is significantly related to the post‐market performance of the firm. Specifically, better CSP disclosure is correlated with higher post‐IPO listing holding period returns among firms that do not disclose donations or environmental expenditures, although the association does not hold for firms that make donations and environmental expenditures. In addition, institutional investors seem to care more about the CEP information for a firm than the CSP information.

The role of intangibles disclosure in Italian IPOs

PurposeThis paper aims to study how primary and secondary market investors react to intangibles information disclosed in Italian IPOs. Previous literature on intangibles information disclosure as a determinant of IPO underpricing has reported inconsistent results; moreover, an area that has remained unexplored is to what extent different categories of market investors react to such information disclosure.Design/methodology/approachBased on a sample of firms listed on the Italian Stock Exchange, the authors use factor analysis to uncover the most relevant intangible assets disclosed in IPO prospectuses; this information is then included in a series of regressions which read into the reaction of primary and secondary market investors by means of price variations.FindingsPrimary market investors are found to be more sensitive to information regarding the company’s attitude towards its human capital and to that describing its innovation capacity in terms of IT and R&D investment. Secondary market investors are more sensitive to strategic alliances, research and development and future plans.Research limitations/implicationsThe findings can be generalized, but the empirical evidence would be more relevant if tested in different geographical contexts (i.e. Europe and/or the USA).Practical implicationsThe empirical results could help firms be more selective in their disclosure, thus possibly soothing management’s concerns regarding an overly extensive, and therefore risky, dissemination of non-financial information and avoiding them to incur unnecessary costs.Social implicationsBeing aware of how the stock market reacts to the information disclosed is crucial in determining new regulations and accounting standards.Originality/valueThe authors introduce an unbiased categorization of intangibles variables that supplants the multiple classifications proposed in the literature, and the authors set apart the reaction of primary and secondary market IPO investors to the intangible information disclosure.

Earnings Management in Domestic and Foreign IPOs in the United States: Do Home Country Institutions Matter?

Using a large sample of domestic and foreign IPOs in the US, we investigate how threats of enforcement by the Securities and Exchange Commission (SEC) and private litigation influence earnings management in IPO prospectuses. We propose that perceptions of foreign institutions may influence SEC enforcement action and private litigation. We provide evidence that enforcement and litigation threats are negatively related to the strength of legal institutions in the foreign IPO’s country of origin. We find earnings management is more pronounced in foreign IPOs from countries with strong legal institutions. We further explore whether earnings management is priced in the IPO market and find no relation between IPO proceeds and earnings management. Our results are consistent with upward earnings management as in Stein (1989), the magnitude of which is reduced when the anticipated cost of enforcement and litigation is higher. Collectively, our results cast doubt on the validity of the bonding hypothesis.

Earnings Management in Domestic and Foreign IPOs in the United States: Do Home Country Institutions Matter?

Using a large sample of domestic and foreign IPOs in the US, we investigate how threats of enforcement by the Securities and Exchange Commission (SEC) and private litigation influence earnings management in IPO prospectuses. We propose that perceptions of foreign institutions may influence SEC enforcement action and private litigation. We provide evidence that enforcement and litigation threats are negatively related to the strength of legal institutions in the foreign IPO’s country of origin. We find earnings management is more pronounced in foreign IPOs from countries with strong legal institutions. We further explore whether earnings management is priced in the IPO market and find no relation between IPO proceeds and earnings management. Our results are consistent with upward earnings management as in Stein (1989), the magnitude of which is reduced when the anticipated cost of enforcement and litigation is higher. Collectively, our results cast doubt on the validity of the bonding hypothesis.

Content analysis of business communication: introducing a German dictionary

Computer-aided text analyses have gained a lot of attention recently. Applied to different types of business communication such as earnings announcements, analyst reports, or IPO prospectuses, they have been used to extract relevant information for financial market participants. A large number of studies employ dictionary-based approaches by referring to specific word lists. Since these lists have been predominantly compiled for the English language, the respective analyses have focused on English business texts. In order to amplify the application of content analyses to other languages, we create a German dictionary designed to measure the textual sentiment of business communication. Our dictionary is based on the English dictionary by Loughran and McDonald (J Finance 66:35–65. https://doi.org/10.1111/j.1540-6261.2010.01625.x , 2011), which is commonly used for examining finance- and accounting-specific texts. We discuss the set-up of our dictionary and extensively test its quality. We further compare our dictionary to German general language dictionaries and to a machine-learning procedure and provide evidence for its ability to capture market-relevant textual sentiment of German business communication.

The Sound of Finance: The Impact of Categorization and Linguistic Congruence on IPO Underpricing

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.

Myopic Managers and Their Foresighted Excuses: Mitigating Downsides of Pre-IPO Earnings Management

In spotlight of the IPO, a major proportion of firms artificially inflates present earnings by making unjustified budget cuts. In doing so, firms successfully impress investors in the short run, but adversely affect firm value for several years causing a negative net effect, which makes myopic management an important subject to research. However, it is yet to be answered which mitigating actions managers take to avoid being blamed for the future downsides of their myopic actions. Thus, building on agency and attribution theory, we examine if firms misleading investors trough myopic management try to obscure this practice and reject responsibility by claiming excuses for expected negative consequences before these occur (i.e., “self-handicapping”). Merging secondary IPO data with longitudinal company data and manually extracted information from IPO prospectuses, we obtain a sample with 591 firm-year observations of 197 US firms going public between 2006-2013. We find that firms engaging in myopic management are indeed prone to self-handicap, especially if they are risk averse and face investors’ scrutiny. Our study reveals that myopic management is not truly short-sighted, but rather a multi-level strategy to mislead investors around IPOs. We discuss theoretical and practical implications, and suggest avenues for further research.

Employee dependence and strategic human capital in IPO of U.S. high-tech firms

Human capital is a key component for the resource base of the firm, particularly in high-tech entrepreneurial firms. However, research is limited in finding the direct impact of human capital of key employees on firm performance. We fill this gap by exploring the effects of dependence on key employees in IPO firms. Using a sample of high-tech firms that went public in the US stock market, we show that the IPO firm's performance is lower when the IPO prospectus discloses such dependence. In addition, among the firms with such disclosures, the long-tenure executives would moderate such negative impact.

The association between earnings forecast in IPOs prospectuses and earnings management: An empirical analysis

This paper examines the level of earnings management for large IPOs that provide earnings forecasts and those that do not provide forecasts in the IPO prospectus. Using a sample f 368 IPO firms listed on the London Stock Exchange between 1985 and 2012, we find that the level of earnings management is lower for IPOs that provided earnings forecasts, than for those which did not provide a forecast. This evidence is robust, controlling for endogeneity and sample selection. Further tests reveal that IPOs that provide forecasts outperform their counterparts in the long run, using various long term performance measures. Overall, our results suggest that earnings forecasts at the time of listing convey useful information to investors on the quality of the company listing in the market.

Valuation Errors and Initial Price Efficiency of NSE Listed IPOs

This paper examined the valuation errors and initial price efficiency of NSE (National Stock Exchange) listed IPOs. The main objective of the study was to determine whether the valuation errors occurred due to deliberate discount given by issuers or due to wrong valuation method used and also attempted to find out the determinants that impacted the performance of IPOs in the initial market. The research study was also aimed to analyze the impact of certain determinants on the performance of IPOs in the initial market. The study examined an initial sample of 151 IPOs listed on the National Stock Exchange over the period from 2009 up to 2016, but there were 31 IPOs that were not listed and traded on NSE. All data were collected from secondary sources, and the majority of the data were collected and extracted from IPO prospectuses. Other variables were collected from companies' websites. After these exclusions, our final sample consisted of 113 IPOs that had complete data on all the variables employed in multiple regressions, and the dependent variable was taken as offer price and independent variables taken were : sales, age of the company, issue size, MAR, net asset value, and debt - equity ratio. The study found the relation between valuation errors and deliberate discounting, and it was found that out of a total of 113 IPO companies, 67 of the IPOs were underpriced, 45 IPO companies were overpriced, and the remaining one IPO traded at its offer price at the end of the first trading day.

Disclosure of Intended Use of IPO Proceeds: Evidence from Malaysia

The primary aim of the study is to investigate what Malaysian IPO issuers indicate as the intended use of IPO proceeds. This is achieved through a manual content analysis of 161 IPO prospectuses during the period of 2005-2013. The results indicate that two major intended uses of IPO proceeds are for capital expenditure and working capital. However, we are perturbed by the frequency of the sampled IPOs’ intention to use the IPO proceeds and the higher percentage of total proceeds used for working capital. This calls for serious regulatory policies that would provide issuers access to equity market and to use the IPO proceeds for growth opportunities. A takeaway from the study provides that intended use of IPO proceeds may provide useful information to potential investors to make informed decisions and for issuers to signal their quality.

Earnings forecasts errors in prospectuses: evidence from initial public offerings on the Warsaw Stock Exchange

Research background: Several studies investigated the issue of accuracy of earnings fore-casts disclosed in IPO prospectus because of its importance in the investor?s decisions. Disclosing earnings forecasts can reduce information asymmetry and encourage potential investors to buy offered shares. The accuracy of earnings forecasts, and especially its deter-minants, was explored by some researchers, but for Polish companies such studies have not been conducted.Purpose of the article: The first objective of this study is to examine the bias and accuracy of earnings forecasts disclosed in IPO prospectuses by Polish companies attempting to be listed on the main market of the Warsaw Stock Exchange. The second aim of this paper is to identify the relationship between the absolute fore-cast error employed as a measure of earnings accuracy and a number of company specific characteristics such as company?s size, leverage, forecast horizon, managerial ownership, number of shares offered to investors (in relation to total shares before IPO).Methods: The empirical analysis were conducted on a sample of 102 domestic companies that performed IPOs on the main market of the Warsaw Stock Exchange during 2006-2015 and disclosed earnings forecasts in IPO prospectus. The forecast error (FER) and absolute forecast error (AFER) were adopted as a measure of accuracy of earnings forecasts. The non-parametric test was employed to achieve the adopted aims.Findings & Value added: The results show that, on average, the forecasted earnings exceed the actual earnings (i.e. the earnings forecasts are optimistic) and fore-casts are inaccurate. Moreover, the optimistic forecasts are more inaccurate than pessimistic ones. The findings of multiple regression model show that three independent variables may affect the level of absolute forecast error: the company?s size, managerial ownership and forecast horizon.

Content Analysis of Business-Specific Text Documents: Introducing a German Dictionary

Computer-aided text analyses have gained a lot of attention recently. Applied to different types of business communication such as earnings announcements, analyst reports, or IPO prospectuses, they have been used to extract relevant information for financial market participants. A large number of studies employ dictionary-based approaches by referring to specific word lists. Since these lists have been predominantly compiled for the English language, the respective analyses have focused on English business texts. In order to amplify the application of content analyses to other languages, we create a German dictionary designed to measure the textual sentiment of business communication. Our dictionary is based on the English dictionary by Loughran and McDonald (J Finance 66:35–65. doi: 0.1111/j.1540-6261.2010.01625.x, 2011), which is commonly used for examining finance- and accounting-specific texts. We discuss the set-up of our dictionary and extensively test its quality. We further compare our dictionary to German general language dictionaries and to a machine-learning procedure and provide evidence for its ability to capture market-relevant textual sentiment of German business communication.

Information Production in Multiple Lead Underwriter IPOs

We use textual analysis techniques to examine how the size of IPO lead underwriting syndicate influences the information production decisions of underwriters. Our results show that IPO prospectuses produced by multiple lead underwriters (MLUs) contain more informative content and use more readable language. These findings imply that MLUs produce and discloses more pricing information during the pre-filing period. We also find that MLUs produce less information during bookbuilding and provide less support for partial adjustment phenomenon. Together, our results suggest that MLUs can substitute the costly bookbuilding with the pre-filing information services.

The Credibility of Earnings Forecasts in IPO Prospectuses and Underpricing

This paper provides empirical evidence of the impact of the voluntary disclosure of management earnings forecasts in IPO prospectuses and of the credibility of these forecasts, as perceived by investors at the time of the IPO. We measure forecast credibility ex ante with two approaches: (i) a vector of determinants of credibility that are observable by market participants at the time of the issue and (ii) the predicted value of the forecast error based on some of these determinants. Controlling for the firm's decision on whether or not to issue a forecast, we find that the issue of a forecast reduces underpricing. We find that the quality of the firm's governance and of the auditor and underwriter associated with the issue seems to act as a substitute to the disclosure of an earnings forecast in the prospectus, so that they significantly decrease the level of underpricing only for non‐forecasters. However, despite our various approaches to measure ex ante credibility, we find no association between the pricing of the issue and perceived forecast credibility at the time of the IPO. Les auteurs produisent des donnees empiriques etablissant l'incidence de la communication volontaire des previsions de resultats de la direction dans les prospectus de PAPE et de la credibilite de ces informations previsionnelles aux yeux des investisseurs, au moment du PAPE. Ils evaluent la credibilite des previsions ex ante a l'aide de deux methodes : i) un vecteur de determinants de la credibilite que peuvent observer les participants au marche au moment de l’emission et ii) la valeur prevue de l'erreur previsionnelle etablie a partir de certains de ces determinants. En controlant la decision de l'entite quant a l'opportunite de communiquer des informations previsionnelles, les auteurs constatent que la communication de ces informations reduit la sous‐evaluation du prix des titres. Ils observent que les proprietes de qualite de la gouvernance de l'entite ainsi que de qualite de l'auditeur et du preneur ferme associes a l’emission semblent se substituer a la communication de previsions de resultats dans le prospectus, de sorte qu'elles peuvent diminuer sensiblement le degre de sous‐evaluation du prix des titres, uniquement dans le cas d'entites qui ne communiquent pas de previsions de resultats. Toutefois, malgre les differentes methodes qu'ils emploient pour mesurer la credibilite ex ante, les auteurs ne relevent aucun lien entre la determination du prix des titres et la credibilite percue des previsions au moment du PAPE.

Intended use of proceeds and post-IPO performance

Abstract We hand collected data from the IPO prospectus on the primary use of proceeds of IPO firms and examine whether it contains useful information about the firm's future performance and survival profile. Specifically, we cover the 1996–2012 period and examine four categories of use of proceeds: debt repayment, investment, marketing and sales promotion, and general corporate purposes. We find that IPOs declaring investment plans as the primary use of proceeds exhibit insignificant average abnormal returns in the three years following the IPO, while IPOs that state debt repayment as the primary use of proceeds are the highest underperformers. Our results confirm the role that the primary use of proceeds plays in explaining the timing motive of IPO firms.

Voluntary Information Disclosure at IPO

Recent studies, starting with Hanley Weiss and Hoberg (2010), have used textual analysis to document that voluntary disclosure of information in IPO prospectuses is associated with lower IPO underpricing. We employ an alternative measure and model the issuer’s choice of information disclosure, documenting what factors lead to higher disclosure. We then find that the effect of disclosure on underpricing is asymmetric: firms that disclose more information enjoy lower underpricing, while firms that disclose less are not penalized by higher underpricing. Our measure allows us to account for the endogenous nature of information disclosure. We can therefore argue that the effect of disclosure on underpricing is causal.

IPO Sponsors and Prospectus Liability: The Bridge Too Far?

IPO Sponsors and Prospectus Liability: The Bridge Too Far?

Analyst coverage and IPO management forecasts

Given the all-importance of analyst coverage for IPO firms, we examine the interaction between the initiation of analyst coverage and management forecast disclosure in IPO prospectuses. We find that IPO firms that provide a prospectus forecast are more likely to receive coverage (and earlier), particularly from lower quality analysts. The depth of coverage, measured by the number of analysts issuing a recommendation on the firm, is also greater for forecasters. These results hold after controlling for potential endogeneity due to simultaneity in management decision to provide a forecast and analysts' decision to cover the firm. Further analyses show that reputation concerns matter to analyst coverage decisions — conditional on firms providing a prospectus forecast, the likelihood of receiving coverage decreases with the magnitude of the absolute management forecast error. There is evidence of quid pro quo where the analyst working for the underwriter of the IPO aligns her forecast with the management forecast more than unaffiliated analysts. Insofar as management forecasts are important to coverage decision and analyst coverage is valuable, our research has important implications for strengthening the safe harbour provision for prospectus forecasts in litigious environments such as that in the U.S.