Disclosure of Downside Risk and Investors' Use of Qualitative Information: Evidence from the IPO Prospectus's Risk Factor Section

Abstract

I use the context of a company's initial public offering (IPO) of equity securities as a capital‐market setting to empirically study the economic consequences of risk factor disclosures. Using data from Australian IPOs, I examine the relation of textual risk disclosures in the prospectus to initial underpricing. I find that the quantity of disclosures in the risk factor section itself has no significant impact on initial underpricing. However, an increase in the informativeness of risk factor disclosures is associated with lower IPO underpricing. My results suggest that IPOs that provide informative risk factor disclosures have less ex ante uncertainty, in the sense that the disclosures help investors estimate the dispersion of secondary market value. The effect of informative risk factor disclosures on IPO underpricing is more pronounced for IPOs with less prestigious lead underwriters and is mainly driven by younger firms, smaller firms, and firms with poorer operating performance prior to their IPOs. Collectively, my findings suggest that informative disclosures of downside risk are useful for investors to evaluate IPOs.

Textual Information and IPO Underpricing: A Machine Learning Approach

“…In particular, the MD&A section describes how managers intend to increase their share price, and boost future revenues and sales (Ferris et al, 2013). The Risk Factors section outlines the potential risks of the firm such as the uncertainty of future products, or regulatory issues (Ding, 2016). Next, the Use of Proceeds section indicates how the firm intends to use the money raised, such as acquisition events, or dividend payments.…”

“…This requirement ensures that investors are properly informed regarding the issuing firms' valuation, future business strategies, and potential risks (Ferris et al, 2013). In fact, the IPO prospectuses are the most informative sources for investors, as the amount of publicly available information for new issues is rather limited (Ding, 2016). In this respect, Hanley and Hoberg (2010) find that a more informative IPO prospectus leads to more accurate offer prices and less underpricing.…”

Apakah Keberadaan Komisaris Keluarga Dan Komisaris Independen Meningkatkan Pengungkapan Risiko?

“…Dalam konteks ini komisaris keluarga menyampaikan sinyal kepada investor mengenai informasi tentang risiko. Sinyal yang diberikan ini diharapkan mampu mengurangi kesenjangan informasi antara perusahaan dan investor (Ding, 2016;Garanina & Dumay, 2017;Widarjo et al, 2017). Dengan mempunyai informasi yang lebih lengkap maka diharapkan investor dapat mengambil keputusan investasi yang tepat.…”

“…Sinyal tersebut dapat berupa pengungkapan informasi di prospektus Pengungkapan informasi yang baik pada prospektus akan memberikan nilai tambah bagi perusahaan. Dalam konteks penawaran saham perdana, pengungkapan informasi secara sukarela dapat mengurangi asimetri informasi (Garanina & Dumay, 2017), sehingga bisa mengurangi underpricing pada saat penawaran saham perdana (Ding, 2016;Widarjo, Rahmawati, Bandi, & Widagdo, 2017) dan meningkatkan nilai perusahaan (Widarjo, 2011). Hal ini menunjukkan pentingnya pengungkapan informasi kepada investor.…”

The role of intangibles disclosure in Italian IPOs

“…Existing studies maintain that voluntary disclosure of non-financial information serves the purpose of reducing stakeholders' uncertainty regarding a firm's future cash flows and thus reduces the cost of capital (Botosan, 2006;Leuz and Wysocki, 2008), even in terms of potential of mis-pricing at the time of the IPO (Lev, 2001;Williams, 2001;Jog and McConomy, 2003;Guo et al, 2005;Leone et al, 2007;Hanley and Hoberg, 2012;Dambra et al, 2015;Boone et al, 2016). Nevertheless, although managers might have strong incentives to disclose non-financial information, they are under equal pressure to prevent or avoid such disclosure to protect a firm's competitive advantage (Verrecchia, 1983;Latimere and Maumere, 2015;Ding, 2016). In addition, the disclosure of information pertaining to intangibles is often believed to give rise to unnecessary costs (Mangena et al, 2010).…”