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http://ssrn.com/abstract=1500571
 
 

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Litigation Risk, Strategic Disclosure and the Underpricing of Initial Public Offerings


Kathleen Weiss Hanley


University of Maryland

Gerard Hoberg


University of Southern California - Marshall School of Business

January 10, 2011


Abstract:     
Using word content analysis on the time-series of IPO prospectuses, we find evidence that issuers trade off underpricing and strategic disclosure as potential hedges against litigation risk. This tradeoff explains a significant fraction of the variation in prospectus revision patterns, IPO underpricing, the partial adjustment phenomenon, and litigation outcomes. We find that strong disclosure is an effective hedge against all lawsuits. Underpricing, however, is an effective hedge only against the incidence of Section 11 lawsuits, those lawsuits which are most damaging to the underwriter. Underwriters who fail to adequately hedge litigation risk experience economically large penalties including loss of market share.

Number of Pages in PDF File: 44

Keywords: Initial Public Offerings, Litigation Risk, Liability Risk, Strategic Disclosure, IPO Prospectus, Text Analysis

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Date posted: November 6, 2009 ; Last revised: January 22, 2012

Suggested Citation

Hanley , Kathleen Weiss and Hoberg, Gerard, Litigation Risk, Strategic Disclosure and the Underpricing of Initial Public Offerings (January 10, 2011). Available at SSRN: http://ssrn.com/abstract=1500571 or http://dx.doi.org/10.2139/ssrn.1500571

Contact Information

Kathleen Weiss Hanley
University of Maryland ( email )
College Park, MD 20742
United States
Gerard Hoberg (Contact Author)
University of Southern California - Marshall School of Business ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
HOME PAGE: http://www-bcf.usc.edu/~hoberg/
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