Litigation risk, strategic disclosure and the underpricing of initial public offerings

Kathleen Hanley and Gerard Hoberg

Journal of Financial Economics, 2012, vol. 103, issue 2, 235-254

Abstract: Using word content analysis on the time-series of IPO prospectuses, we show that issuers tradeoff underpricing and strategic disclosure as potential hedges against litigation risk. This tradeoff explains a significant fraction of the variation in prospectus revision patterns, IPO underpricing, the partial adjustment phenomenon, and litigation outcomes. We find that strong disclosure is an effective hedge against all types of lawsuits. Underpricing, however, is an effective hedge only against Section 11 lawsuits, those lawsuits which are most damaging to the underwriter. Underwriters who fail to adequately hedge litigation risk experience economically large penalties, including loss of market share.

Keywords: Litigation risk; Initial public offerings; Initial returns; Partial adjustment; Strategic disclosure (search for similar items in EconPapers)
JEL-codes: G24 G32 G38 K22 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (79)

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Working Paper: Litigation risk, strategic disclosure and the underpricing of initial public offerings (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:2:p:235-254

DOI: 10.1016/j.jfineco.2011.09.006

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