Voluntary Disclosure and Real Investment Distortions in IPOs

We examine the eects of IPO underpricing on capital investment e¢ ciency when informed insiders — concerned about their investment funding — strategically disclose value-relevant information to oset the informational advantage of informed traders. To induce participation by uninformed investors, managers can disclose information or alternatively choose not to disclose and issue the IPO at a discount to compensate for their expected loss from trading against the informed investors. As intensity of informed traders increases, this underpricing becomes severe and managers strategically respond by disclosing more often. We show that above a threshold, full disclosure emerges in equilibrium. But, extensive disclosure and consequent low average underpricing can in fact be indicative of under-investment because some …rms with positive NPV projects fail to go public. On the other hand, high average underpricing and less disclosure can be indicative of over-investment because some …rms with negative NPV projects succeed in going public.

[1]  Praveen Kumar,et al.  Voluntary Disclosures, Corporate Control, and Investment , 2012 .

[2]  A. Beyer,et al.  Voluntary Disclosure, Manipulation and Real Effects , 2012 .

[3]  Gerard Hoberg,et al.  Litigation Risk, Strategic Disclosure and the Underpricing of Initial Public Offerings , 2011 .

[4]  Praveen Kumar,et al.  Lemons or Cherries? Growth Opportunities and Market Temptations in Going Public and Private , 2010, Journal of Financial and Quantitative Analysis.

[5]  Gerard Hoberg,et al.  The Information Content of IPO Prospectuses , 2009 .

[6]  S. Sivaramakrishnan,et al.  Voluntary Disclosures and Analyst Feedback , 2009 .

[7]  J. Spindler.  IPO Underpricing, Disclosure, and Litigation Risk , 2009 .

[8]  K. Sivaramakrishnan,et al.  Voluntary Disclosures and Information Production By Analysts , 2007 .

[9]  M. Pagano,et al.  IPO underpricing and after-market liquidity , 2006 .

[10]  G. Schwert,et al.  The Variability of IPO Initial Returns , 2006 .

[11]  Robert E. Verrecchia,et al.  Information Disclosure and Adverse Selection Explanations for IPO Underpricing , 2005 .

[12]  James C. Brau,et al.  Initial Public Offerings: An Analysis of Theory and Practice , 2004 .

[13]  Ronald A. Dye,et al.  Resource Allocation Effects of Price Reactions to Disclosures , 2002 .

[14]  Michelle Lowry,et al.  Litigation Risk and IPO Underpricing , 2001 .

[15]  Francesca Cornelli,et al.  Bookbuilding: How Informative is the Order Book , 2001 .

[16]  David Aboody,et al.  CEO stock option awards and the timing of corporate voluntary disclosures , 2000 .

[17]  Tim Loughran,et al.  The New Issues Puzzle , 1995 .

[18]  Ronald A. Dye,et al.  Industry-Wide Disclosure Dynamics , 1995 .

[19]  Robert E. Verrecchia,et al.  Disclosure, Liquidity, and the Cost of Capital , 1991 .

[20]  Chuan-Yang Hwang,et al.  Non-disclosure and Adverse Disclosure as Signals of Firm Value , 1990 .

[21]  William J. Wilhelm,et al.  A comparative analysis of IPO proceeds under alternative regulatory environments , 1990 .

[22]  S. M. Tiniç,et al.  Anatomy of Initial Public Offerings of Common Stock , 1988 .

[23]  R. Dye.  DISCLOSURE OF NONPROPRIETARY INFORMATION , 1985 .

[24]  Sanford J. Grossman.  On the Impossibility of Informationally Efficient Markets , 1980 .

[25]  Roger G. Ibbotson,et al.  "Hot Issue" Markets , 1975 .

[26]  Itay Goldstein,et al.  Manipulation and the Allocational Role of Prices , 2008 .

[27]  M. Lowry.  Why Does IPO Volume Fluctuate so Much? , 2003 .

[28]  M. Darrough,et al.  Financial disclosure policy in an entry game , 1990 .

[29]  P. Spindt,et al.  How investment bankers determine the offer price and allocation of new issues , 1989 .

[30]  Kevin F. Rock.  Why new issues are underpriced , 1986 .

[31]  Jay R. Ritter,et al.  The "Hot Issue" Market of 1980 , 1984 .