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

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