Seasoned Equity Issuers’ Prospectus Filings: How Informative Is Their Tone?

74 Pages Posted: 4 Nov 2020 Last revised: 26 Jul 2021

See all articles by Rongbing Huang

Rongbing Huang

Kennesaw State University - Michael J. Coles College of Business

Hong Qian

Oakland University - Department of Accounting and Finance

Santhosh Ramalingegowda

University of Georgia - Terry College of Business

Date Written: July 24, 2021

Abstract

Seasoned equity issuers file Forms S and 424B with the Securities and Exchange Commission. We find that the weak-modal tone of 424B filings is positively related to offer price discounts and negatively related to offer-day stock returns. Increases in cautionary (weak-modal, uncertain and negative) tone from the initial S filing to the 424B filing are followed by low abnormal stock returns during the three or ten trading days after the offering. We also provide preliminary evidence that the use of cautionary tone relates positively to litigation risk and increased after the passage of the Sarbanes-Oxley Act. Our findings suggest that the cautionary tone of seasoned equity issuers’ prospectuses has significant negative information content, which is gradually incorporated into the stock prices.

Keywords: Textual Analysis, Tone, Disclosure, Cautionary Tone, Uncertain Tone, Weak-Modal Tone, Negative Tone, Security Issuance, Equity Issuance, Seasoned Equity Offering, SEO, Offer Price Discount, Underpricing, Corporate Disclosure, Risk Disclosure

JEL Classification: G14; G18; G24

Suggested Citation

Huang, Rongbing and Qian, Hong and Ramalingegowda, Santhosh, Seasoned Equity Issuers’ Prospectus Filings: How Informative Is Their Tone? (July 24, 2021). Available at SSRN: https://ssrn.com/abstract=3694659 or http://dx.doi.org/10.2139/ssrn.3694659

Rongbing Huang (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

560 Parliament Garden Way
Mail Drop #0403
Kennesaw, GA 30144
United States

Hong Qian

Oakland University - Department of Accounting and Finance ( email )

347 Elliott Hall
275 Varner Dr.
Rochester, MI 48309
United States

Santhosh Ramalingegowda

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3612 (Phone)

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