Is Disclosure Transparency a Panacea to IPO Underpricing?

• In Event: Culture and Institutional Influences

Abstract

This study examines whether disclosure transparency serves as a panacea to underpricing in China’s IPO market. Prior research shows that more stringent IPO disclosure requirements and more informative IPO prospectus disclosure are associated with smaller IPO underpricing. Using China’s domestic IPOs during 2006-2012, we find that the sheer count of risk factor disclosed in the IPO prospectus is not associated with smaller IPO underpricing, but higher quality risk disclosure is. Interestingly, the benefit of high quality risk disclosure only accrues to firms with political connections. For firms without political connections, high quality risk factor disclosure does not matter to IPO underpricing, even though ex post it proves to be informative about post-IPO return volatility.

Authors

• Isabel Wang, Michigan State University

• Yi Yao, Nankai University