How Does Ambiguity Influence IPO Underpricing? The Role of the Signalling Environment

Haemin Dennis Park and Pankaj C. Patel

Journal of Management Studies, 2015, vol. 52, issue 6, 796-818

Abstract: type="main">

We explore the relationship between ambiguity, or low information clarity, in the IPO prospectus of newly public firms and their underpricing. Consistent with signalling theory, we find that IPO underpricing is low when the prospectus contains less ambiguous information that creates a more reliable signal conveying the quality of the IPO firm. However, the positive association between ambiguity and IPO underpricing is less pronounced when IPO firms display low strategic conformity with other firms in the industry, operate in industries with high valuation heterogeneity, or are medium-sized. Using a sample of 398 IPOs between 1998 and 2007, our results support these predictions. This study shows the importance of the signalling environment influencing boundedly rational signal recipients interpreting ambiguous signals.

Date: 2015
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