Uncertainty and IPO initial returns: Evidence from the Tone Analysis of China\u27s IPO Prospectuses

Abstract

© 2018 Elsevier B.V. IPO prospectuses play an irreplaceable role in the IPO process. The tone of IPO prospectuses, in terms of its definitiveness in characterizing the prospects and assessing the risks of different firms, could affect investors\u27 capability to estimate the firms that are about to go public. In a large sample of 1320 IPO prospectuses of China\u27s A-share market from 2007 to 2016, we find that uncertain or negative tone of IPO prospectuses is significantly associated with IPO initial returns and the post-IPO return volatility. Besides, empirical evidence shows that the negative or uncertain tone in the prospectuses lowers the stocks\u27 long-term returns. Our findings contribute to the literature by investigating the impact of connotative information transmission on stock returns during IPO process, based on which investors can do a better job in risk management