Uncertainty, Prospectus Content, and the Pricing of Initial Public Offerings

Abstract

We investigate how information is incorporated into initial public offering (IPO) share prices. We find that greater uncertainty about the value of a firm’s shares is associated with more prospectus disclosures concerning the firm’s competitive environment and a more conservative anticipated price range. The evidence suggests that potential investors help evaluate and incorporate information disclosed in the prospectus into the IPO price through the book-building process. However, not all of the relevant information is reflected in the IPO price. The evidence also suggests that investors receive compensation for their price discovery efforts through underpricing in the IPO.

Keywords: Initial Public Offering, Underpricing, Investment Banking

JEL Classification: G32, G24