Abstract

http://ssrn.com/abstract=1810084
 
 

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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 Maryland - Department of Finance

January 1, 2011

FEDS Working Paper No. 2011-12

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: 45

Keywords: initial public offerings, disclosure, litigation, securities underwriting

JEL Classification: G32, G24, G14

Accepted Paper Series


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Date posted: April 18, 2011 ; Last revised: December 19, 2011

Suggested Citation

Hanley , Kathleen Weiss and Hoberg, Gerard, Litigation Risk, Strategic Disclosure and the Underpricing of Initial Public Offerings (January 1, 2011). FEDS Working Paper No. 2011-12. Available at SSRN: http://ssrn.com/abstract=1810084

Contact Information

Kathleen Weiss Hanley (Contact Author)
University of Maryland ( email )
College Park, MD 20742
United States
Gerard Hoberg
University of Maryland - Department of Finance ( email )
Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States
HOME PAGE: http://www.rhsmith.umd.edu/finance/faculty/hoberg.aspx
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