IPO Underpricing, Disclosure, and Litigation Risk

2009 ◽  
Author(s):  
James C. Spindler
Keyword(s):  
Litigation Risk ◽  
Ipo Underpricing

An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms

2004 ◽  
Vol 23 (1) ◽  
pp. 53-67 ◽  
Author(s):  
Steven R. Muzatko ◽  
Karla M. Johnstone ◽  
Brian W. Mayhew ◽  
Larry E. Rittenberg
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Limited Liability ◽  
Litigation Risk ◽  
Ipo Underpricing ◽  
Audit Firm ◽  
Legal Structure ◽  
Audit Firms ◽  
Public Offering

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.

Litigation risk and IPO underpricing

2002 ◽  
Vol 65 (3) ◽  
pp. 309-335 ◽  
Author(s):  
Michelle Lowry ◽  
Susan Shu
Keyword(s):  
Litigation Risk ◽  
Ipo Underpricing

Can textual analysis solve the underpricing puzzle? A US REIT study

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nino Martin Paulus ◽  
Marina Koelbl ◽  
Wolfgang Schaefers
Keyword(s):  
Initial Public Offering ◽  
Textual Analysis ◽  
Real Estate Investment Trust ◽  
Litigation Risk ◽  
Information Asymmetries ◽  
Qualitative Information ◽  
Ipo Underpricing ◽  
Content Type ◽  
Public Offering ◽  
Practical Implications

PurposeAlthough many theories aim to explain initial public offering (IPO) underpricing, initial-day returns of US Real Estate Investment Trust (REIT) IPOs remain a “puzzle”. The literature on REIT IPOs has focused on indirect quantitative proxies for information asymmetries between REITs and investors to determine IPO underpricing. This study, however, proposes textual analysis to exploit the qualitative information, revealed through one of the most important documents during the IPO process – Form S-11 – as a direct measure of information asymmetries.Design/methodology/approachThis study determines the level of uncertain language in the prospectus, as well as its similarity to recently filed registration statements, to assess whether textual features can solve the underpricing puzzle. It assumes that uncertain language makes it more difficult for potential investors to price the issue and thus increases underpricing. Furthermore, it is hypothesized that a higher similarity to previous filings indicates that the prospectus provides little useful information and thus does not resolve existing information asymmetries, leading to increased underpricing.FindingsContrary to expectations, this research does not find a statistically significant association between uncertain language in Form S-11 and initial-day returns. This result is interpreted as suggesting that uncertain language in the prospectus does not reflect the issuer's expectations about the company's future prospects, but rather is necessary because of forecasting difficulties and litigation risk. Analyzing disclosure similarity instead, this study finds a statistically and economically significant impact of qualitative information on initial-day returns. Thus, REIT managers may reduce underpricing by voluntarily providing more information to potential investors in Form S-11.Practical implicationsThe results demonstrate that textual analysis can in fact help to explain underpricing of US REIT IPOs, as qualitative information in Forms S-11 decreases information asymmetries between US REIT managers and investors, thus reducing underpricing. Consequently, REIT managers are incentivized to provide as much information as possible to reduce underpricing, while investors could use textual analysis to identify offerings that promise the highest returns.Originality/valueThis is the first study which applies textual analysis to corporate disclosures of US REITs in order to explain IPO underpricing.

Economic Determinants and Consequences of the Proactive Disclosure of Internal Control Weaknesses and Remediation Progress in IPOs

2017 ◽  
Vol 37 (4) ◽  
pp. 1-24 ◽  
Author(s):  
Sudipta Basu ◽  
Jagan Krishnan ◽  
Jong Eun Lee ◽  
Yinqi Zhang
Keyword(s):  
Internal Control ◽  
Audit Committees ◽  
Litigation Risk ◽  
Due Diligence ◽  
Ipo Underpricing ◽  
Going Public ◽  
Economic Determinants ◽  
Sarbanes Oxley ◽  
Internal Control Weaknesses ◽  
Jel Classifications

SUMMARY This study investigates (1) why some IPO firms proactively disclose internal control weaknesses (ICWs) and remediation progress in their prospectuses before going public, despite being exempt from the requirements of Sections 302 and 404 of the Sarbanes-Oxley Act at the time of IPO, and (2) the association of such disclosures with IPO underpricing (i.e., the first-day return). We find that IPO firms that proactively disclose ICWs and remediation progress have higher litigation risk, are audited by industry specialist auditors, and are more likely to have audit committees prior to the IPO, compared with firms that do not disclose such information, after controlling for the ex ante probability of having ICWs. IPO underpricing is lower for firms that disclose ICWs and remediation progress, consistent with the conjecture that the disclosure of ICWs and remediation progress signals extensive premarket due diligence, thus reducing the information asymmetry between informed and uninformed investors. JEL Classifications: G24; K22; M13; M41; M42; M49.

Legal opportunism, litigation risk, and IPO underpricing

2015 ◽  
Vol 68 (2) ◽  
pp. 326-340 ◽  
Author(s):  
Thomas Walker ◽  
Harry J. Turtle ◽  
Kuntara Pukthuanthong ◽  
Dolruedee Thiengtham
Keyword(s):  
Litigation Risk ◽  
Ipo Underpricing

Why Has IPO Underpricing Changed over Time?

CFA Digest ◽  
2005 ◽  
Vol 35 (2) ◽  
pp. 80-80
Author(s):  
William H. Sackley
Keyword(s):  
Ipo Underpricing ◽  
Over Time
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