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IPO Underpricing, Disclosure, and Litigation Risk

James C. Spindler, University of Southern California Law School

Abstract

Using a unique data set, I find that U.S. IPO prospectus disclosure dramatically affects the degree of first day underpricing of the new issue, consistent with theories of underpricing as caused by informational asymmetry. In particular, a 1 standard deviation increase in positive prospectus disclosure is associated with almost a third reduction in first day underpricing. More disclosure also has a significant positive relation with measures of informational completeness. Further, I show that the amount of disclosure may derive from litigation risk. Controlling for measures of litigation risk, more disclosure exhibits a significant and positive relation with IPO litigation, while absent controls the relation is negative – suggesting that the amount of disclosure responds to ex ante perceived risk of litigation.

Subject Area

Corporations, Economics, Law and Economics, Securities Law

Recommended Citation

James C. Spindler, "IPO Underpricing, Disclosure, and Litigation Risk" (April 2009). University of Southern California. University of Southern California Law and Economics Working Paper Series. Working Paper 94.
http://law.bepress.com/usclwps/lewps/art94

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