Strategic Disclosure and the Pricing of Initial Public Oerings

In this paper, we examine the word content of 2,043 initial IPO prospectuses along with their full time series of amendments. We find that the relative size of four key document sections predicts the magnitude of the partial price adjustment, first day IPO returns, and long-run post-oer performance. By assessing the word similarity between IPOs, we show that the writing of the prospectus is a collaborative eort involving underwriters, legal counsel and auditors in conjunction with the issuing firm. We find two key results that contribute to the literature on both the partial adjustment phenomenon and disclosure theory. First, issuing firm managers, through MD&A, perform a surprisingly integral role in the bookbuilding process as greater management disclosure generates higher oer prices and superior long-run performance. Second, litigation risk plays an important function in strategic disclosure, as only negative information learned during from bookbuilding is disclosed in amendments to the prospectus. Thus, positive information is withheld for strategic or proprietary reasons while negative information is disclosed as a hedge against litigation risk.