The Effect of Issuer Conservatism on IPO Pricing and Performance

Review of Finance, Forthcoming

45 Pages Posted: 10 Apr 2012 Last revised: 21 Aug 2017

See all articles by Stephen P. Ferris

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

Grace Qing Hao

Department of Finance and Real Estate, The University of Texas at Arlington

Min-Yu (Stella) Liao

Illinois State University - Department of Finance, Insurance and Law

Date Written: April 10, 2012

Abstract

Based on a textual analysis of IPO prospectuses, we obtain a number of important findings regarding the relation between the conservatism in prospectuses, IPO pricing, and subsequent operating and stock return performance. First, prospectus conservatism is positively related to underpricing, with the relation more pronounced for technology than non-technology firms. Second, for non-technology IPOs, prospectus conservatism is able to predict the firm’s post-IPO operating performance. Specifically, we find that conservatism is inversely related to the firm’s operating performance for the three years following the IPO. However, this predictability is limited to non-technology IPOs. Finally, we find some evidence that for non-technology IPOs conservatism is inversely related to the firm’s post-IPO abnormal stock return. We conclude that the conservatism contained in an IPO’s prospectus contains useful information about pricing and subsequent operating and stock return performance. Moreover, prospectus conservatism for non-technology IPOs deserves more attention from investors.

Keywords: Initial public offering (IPO), prospectus, conservatism, negative tone, underpricing

JEL Classification: G12, G14, G24

Suggested Citation

Ferris, Stephen P. and Hao, Grace Qing and Liao, Min-Yu (Stella), The Effect of Issuer Conservatism on IPO Pricing and Performance (April 10, 2012). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2037942

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

Grace Qing Hao (Contact Author)

Department of Finance and Real Estate, The University of Texas at Arlington ( email )

701 S. West Street
Arlington, TX 76019
United States

Min-Yu (Stella) Liao

Illinois State University - Department of Finance, Insurance and Law ( email )

Normal, IL 61790
United States

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