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.
Earnings management occurs when managerial discretion allows managers to influence reported earnings and thus mislead some investors about the underlying economic performance and quality of the firm. This study considers how potential investors may guard against earnings management by observing negative stock price reaction at the lockup expiration period of initial public offering (IPO) firms as a negative signal. Findings from a sample of 160 newly public firms show that earnings management behaviour is stronger in IPO firms backed by venture capitalists (VCs). Moreover, VC reputation negatively moderates this relationship such that IPO firms backed by reputable VCs are less likely to manage earnings, suggesting that reputable VCs serve an auditing function following an IPO. Overall, we provide insights into signalling theory by examining negative signals arising from the behaviour of multiple agents in an IPO firm.
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