The Information Content of IPO Prospectuses
Review of Financial Studies, Vol. 23, p. 2821-2864, 2010
54 Pages Posted: 15 Jan 2009 Last revised: 22 Jan 2012
Date Written: October 15, 2009
Using word content analysis, we decompose information in the IPO prospectus into its standard and informative components. Greater informative content, as a proxy for pre-market due diligence, results in more accurate offer prices and less underpricing because it decreases the issuing firm’s reliance on bookbuilding to price the issue. The opposite is true for standard content. Greater content from high reputation underwriters and issuing firm managers, through Management’s Discussion and Analysis, contribute to the informativeness of the prospectus. Our results suggest that pre-market due diligence and disclosure by underwriters and issuers can serve as a substitute for costly bookbuilding.
Keywords: IPOs, Disclosure, Underpricing, Initial Public Offerings, Book Building, Due Diligence, Equity Offerings
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