Determinants of corporate tone in an initial public offering: Powerful CEOs versus well-functioning boards

Maximiliano González, Alexander Guzmán, Diego F. Tellez-Falla and María Andrea Trujillo

Research in International Business and Finance, 2021, vol. 58, issue C

Abstract: Recent literature on initial public offerings (IPOs) suggests a significant effect of tone in IPO underpricing but ignores its determinants. This study concentrates on the factors that shape the tone of the information disclosed in IPOs. Sampling 211 Latin American IPOs during the period 2000–2019, we find empirical evidence that a powerful CEO can influence tone, avoiding unfavorable tone and fostering the use of positive words in the information disclosed to the market. We also show that more independent boards tend to use more unfavorable tones. Additionally, we find a non-monotonic relationship between board size and the tone in the prospectus, which suggests that an optimal board size mitigates the excessive use of positive tone and leads to more unfavorable tones in the IPO prospectus. Overall, well-functioning boards counterbalance powerful CEOs and generate more realistic disclosure to the market. Finally, we find that market-dominant auditors, age of the issuing firm, proposed use of proceeds, and the number of risk factors significantly affect the tone in the information disclosed.

Keywords: Initial public offer; Text analysis; Information disclosure; Corporate governance; IPO valuation (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:58:y:2021:i:c:s0275531921001021

DOI: 10.1016/j.ribaf.2021.101481

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