Community Social Capital, Managerial Opportunistic Behavior, and Information Uncertainty in IPO Firms

Abstract

We examine whether and how community social capital influences the information uncertainty of a private firm’s going public process. We find that high social capital of the U.S. counties in which IPO firms are headquartered significantly reduces underpricing and post-IPO stock volatility. This relation is stronger under lessened disclosure requirements and less reputable underwriting. Further findings suggest that high social capital constrains IPO issuers from practicing opportunistic financial reporting. We document that high social capital is associated with more readable prospectus, less financial misconduct, more readable annual reports, and better long-run stock return performance in the years following the IPOs.

Keywords: Community social capital, information uncertainty, underpricing, volatility, S-1 filings, financial reporting quality

JEL Classification: A13, G34, M48