Legal academics and practitioners have long emphasized the important role that disclosure plays in the initial public offering (IPO) process. Issuers and their underwriters provide information via a prospectus and corresponding IPO roadshow to mitigate the information gap between the insiders of the firm and prospective investors. Evidence across a range of studies finds that the reduction in information asymmetry lowers firms’ issuance costs (cost of capital) and allows them to raise more equity in the offering. Studies are largely silent, though, on how investors learn of the IPO firm as a potential investment. Classic finance theory suggests that before investors can process detailed information (such as regulatory reporting within an IPO prospectus), investors must first incur search costs to become aware of a firm. As a result, firms that stimulate increased awareness (or “visibility”) with prospective investors should prompt additional interest in their stock, resulting in a price increase.
Despite this prediction, IPO firms face regulatory constraints on disclosure prior to an IPO, with rules specifically prohibiting any solicitations of interest by the firm prior to filing its prospectus with the U.S. Securities and Exchange Commission (SEC). Violations of these rules are referred to as “gun jumping”. It’s unclear, therefore, whether firms will disclose information outside of the regulated prospectus and roadshow to enhance visibility.
In our paper, Voluntary Disclosure and Firm Visibility: Evidence from Firms Pursuing an Initial Public Offering, we consider the visibility-enhancing role that disclosure can play in the IPO process. We focus on two forms of voluntary disclosure used by firms prior to filing a prospectus: firm-initiated press releases and attendance at investor and industry conferences. From a sample of roughly 600 IPOs from 2004 to 2014, we find that press releases and conferences are common pre-IPO disclosure strategies. The median firm pursuing an IPO issues two press releases, and 16.7 percent of firms attend an investor conference in the year before the issuance of a prospectus. Consistent with press releases being made to enhance firm visibility, most are short (less than a page) and predominantly product-related (36 percent). Further, we find that the use of pre-prospectus disclosure accelerated following a rule change in December 2005 by the SEC designed to modernize disclosure rules surrounding the IPO process.
To shed light on whether pre-prospectus disclosures serve to generate visibility for a newly public firm, we examine how they affect several IPO-related outcomes. We examine the following IPO-related outcomes most commonly associated with visibility: (1) investor demand for regulated financial information; (2) investor demand for the firm’s equity; (3) the breadth of post-IPO equity investors; and (4) post-IPO coverage by information intermediaries such as analysts and the financial press. If pre-prospectus disclosure enhances a firm’s visibility, we would expect elevated investor demand for financial information; positive IPO filing price revisions and initial returns; increased breadth of ownership; and greater post-IPO coverage by information intermediaries. Alternatively, if these forms of disclosure also (or primarily) reduce information gaps between insiders and investors, we would expect lower IPO initial returns (i.e., underpricing) and lower bid-ask spreads in the post-IPO period, which would indicate lower information asymmetries.
We find that investor search activity on the SEC’s EDGAR site during the IPO filing period is positively related to the issuance of pre-prospectus press releases and conference attendance. Because the filing period includes the IPO roadshow, this evidence suggests a complementary relation between pre-prospectus disclosures and subsequent information search by prospective investors. With regard to whether shareholder demand for IPO shares is affected by pre-prospectus voluntary disclosure, we find a positive association between it and IPO filing price revisions. In further support of a visibility-enhancing role, we find a positive relation between measures of post-IPO coverage by information intermediaries and pre-prospectus disclosure. For example, a one-standard deviation increase in the number of press releases issued is associated with a 13.5 percent increase in the number of analysts following a firm and a 13.5 percent rise in the number of post-IPO media articles, while attending at least one broker conference is associated with a 16.9 percent predicted increase in the number of post-IPO articles in financial media. We also find that IPO firms’ investor bases are more dispersed (with fewer concentrated holdings) in the presence of pre-prospectus disclosures. In contrast, we find little evidence that pre-prospectus press releases and conference attendance meaningfully reduce information gaps between insiders and investors. In particular, inconsistent with these disclosures reducing uncertainty for investors trading in the IPO firms’ shares, we find no relation between pre-prospectus disclosures and either post-IPO bid-ask spreads or equity price volatility.
Our evidence suggests that despite regulatory rules prohibiting certain types of disclosure prior to filing a prospectus, firms can (and do) generate more attention for their shares when going public by modifying their pre-prospectus, voluntary disclosure strategies.
This post comes to us from professors Michael Dambra at the University at Buffalo, SUNY; Bryce Schonberger at the University of Rochester; and Charles Wasley at the University of Rochester. It is based on their recent article, “Voluntary Disclosure and Firm Visibility: Evidence From Firms Pursuing an Initial Public Offering,” available here.