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

45 Pages Posted: 18 Apr 2011 Last revised: 28 Aug 2014

Kathleen Weiss Hanley

Lehigh University - College of Business & Economics

Gerard Hoberg

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 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.

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

JEL Classification: G32, G24, G14

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: https://ssrn.com/abstract=1810084

Kathleen Weiss Hanley (Contact Author)

Lehigh University - College of Business & Economics ( email )

Bethlehem, PA 18015
United States

Gerard Hoberg

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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