Is IPO Underpricing Related to Litigation Risk? Evidence Based on the Private Securities Litigation Reform Act of 1995

2004 ◽  
Author(s):  
Yun Ellen Zhu
Keyword(s):  
Evidence Based ◽  
Litigation Risk ◽  
Ipo Underpricing ◽  
Securities Litigation

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.

scholarly journals The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy

2015 ◽  
Vol 50 (1-2) ◽  
pp. 251-275 ◽  
Author(s):  
Matteo Arena ◽  
Brandon Julio
Keyword(s):  
Investment Decisions ◽  
Market Value ◽  
Corporate Investment ◽  
Class Action ◽  
Investment Policy ◽  
Capital Expenditures ◽  
Litigation Risk ◽  
Securities Litigation ◽  
Corporate Liquidity ◽  
Temporal Effects

AbstractThe risk of securities class action litigation alters corporate savings and investment policy. Firms with greater exposure to securities litigation hold significantly more cash in anticipation of future settlements and other related costs. The result is due to firms accumulating cash in anticipation of lawsuits and not a consequence of plaintiffs targeting firms with high cash levels. The market value of cash is lower for firms exposed to litigation risk. Corporate investment decisions are also affected by litigation risk, as firms reduce capital expenditures in response. Our results are robust to endogeneity concerns and possible spurious temporal effects.

Litigation risk and IPO underpricing

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

Measuring securities litigation risk

2012 ◽  
Vol 53 (1-2) ◽  
pp. 290-310 ◽  
Author(s):  
Irene Kim ◽  
Douglas J. Skinner
Keyword(s):  
Litigation Risk ◽  
Securities Litigation

Litigation Risk and Abnormal Accruals

2011 ◽  
Vol 30 (2) ◽  
pp. 231-256 ◽  
Author(s):  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Earnings Management ◽  
Equation System ◽  
Simultaneous Equation ◽  
Litigation Risk ◽  
Securities Litigation ◽  
Simultaneous Equation System ◽  
Specific Risk ◽  
Time Period ◽  
Abnormal Accruals ◽  
Auditor Litigation

SUMMARY In this paper, we examine the relation between auditor litigation risk and abnormal accruals over the 1989–2007 time period. We address potential endogeneity in prior studies by jointly modeling abnormal accruals and litigation risk in a simultaneous equation system. Our findings suggest that client-specific litigation risk affects auditor incentives to acquiesce to client demands for earnings management, i.e., the higher the risk of auditor litigation, the greater the auditor's restraining influence on the abnormal accruals reported by the client. We also find evidence that abnormal accruals increase the likelihood of auditor litigation. We also document that the 1995 Public Securities Litigation Reform Act (PSLRA) lowered the client-specific risk of auditor litigation. Litigation reform remains a topic of ongoing interest. Our findings contribute to a better understanding of the effects of litigation reform (and related changes in legal exposure) on auditor incentives and earnings management.

Securities litigation risk and board gender diversity

2021 ◽  
pp. 102102
Author(s):  
Mohammad Hashemi Joo ◽  
Edward Lawrence ◽  
Ali Parhizgari
Keyword(s):  
Gender Diversity ◽  
Litigation Risk ◽  
Securities Litigation ◽  
Board Gender Diversity

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.

Sign in / Sign up

Export Citation Format

Share Document