Investor Demand for Information in Newly Issued Securities
Scott W. Bauguess
US Securities & Exchange Commission
John Cooney Jr.
Texas Tech University - Rawls College of Business
Kathleen Weiss Hanley
University of Maryland
December 12, 2013
The existence of informed investors is a necessary condition for informationally efficient prices. Numerous studies examine the role of information suppliers in the price discovery process (e.g., underwriters, analysts, auditors, venture capitalists). From the investor’s perspective, researchers typically rely on proxies for informativeness (e.g., institutional versus retail investors, trade size) due to a lack of observable data. Our study directly measures investor demand for information and its impact on security prices using search traffic associated with corporate filings on the EDGAR system of the Securities and Exchange Commission (SEC). Our analysis focuses on the registration period for IPOs when the lead underwriter solicits information from purchasing investors to establish the firm’s market value. Information asymmetries between investors and the issuing firm are likely to be high during this period, increasing the value of information acquisition. Consistent with the important role of informed investors in the price discovery process, we find that EDGAR search traffic significantly increases for peer firms on IPO filing dates. We also find that investor demand for information is positively related to the probability of IPO success, and can predict both price revisions and initial returns. Overall, our results indicate that information acquisition is reflected in the pricing of newly issued securities.
Number of Pages in PDF File: 52
Keywords: IPOs, bookbuilding, EDGAR, disclosure, underpricing, search traffic, information acquisition
JEL Classification: D82, D83, G14
Date posted: January 15, 2014
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