Strategic Disclosure and the Pricing of Initial Public Offerings

Abstract:     
We examine IPO price formation and strategic disclosure by analyzing the word content of 9,818 IPO filings including the initial prospectus as well as each amendment. We find three primary results that motivate extensions to IPO theory. First, disclosure is an important component in price formation as the relative size of the document sections predicts the magnitude of the partial price adjustment, first day IPO returns, and long-run post-offer performance. Second, the writing of the prospectus is collaborative effort involving underwriters, legal counsel, auditors and the issuing firm with different authors performing separate functions in the disclosure of information. A key conclusion is that issuing firm managers, through MD&A, play a surprisingly integral role in the bookbuilding process, as greater management disclosure generates higher offer prices and superior long-run performance. Third, information generated during bookbuilding is asymmetrically disclosed. Positive information is withheld for strategic or proprietary reasons while negative information is disclosed as a hedge against litigation risk.

Keywords: initial public offerings, disclosure, partial adjustment, litigation risk, MD&A, prospectus, word content analysis

JEL Classifications: G14, G24, G30, G32

Working Paper Series