Is there useful information in the ‘use of proceeds’ disclosures in IPO prospectuses?

Abstract

This study contributes evidence on the valuation relevance of the 'use of proceeds' disclosure in the initial public offering (IPO) prospectus. This article develops a classification of 'use of proceeds' disclosures that aims to capture information embedded in the disclosures relating to the purpose (growth, production, financing) and amount committed to specific assets. These measures are then related to IPO underpricing, survival prediction and expected and realised prospects of the IPOs. The results suggest the 'use of proceeds' disclosure categories have incremental information over other sources of information for underpricing, for predicting firm survival and in the case of some disclosure categories, for investors' evaluation of the firms' prospects and risks in the early years after listing.A. Wyatt/Accounting and Finance 54 (2014) 625-667 3 Factors previously considered include the market-to-book ratio, age and size (Ritter, 1999); information asymmetry (Rock, 1986), and the bargaining power of underwriters

Initial public offer pricing, corporate governance and contextual relevance: Australian evidence

“…These associations accord with the change in ex ante uncertainty posited to be signalled and as discussed in the literature. Other uses of funds were not significant and may reflect divergent underlying specificity in those categories and so a diminished explanatory power (Balatbat and Bertinshaw, ; Wyatt, ). The associations between IPO return with firm size ( SZE ) and market returns ( MKT ) are in the expected directions but not significant.…”

“…Mixed associations have been observed in the prior literature, and the outcomes here are not considered atypical (e.g. contrasting or no direction of statistically significant association between IPO returns and underwriter reputation, and/or retained ownership, can be observed across Clarkson, ; How et al ., ; Lee et al ., ; Dimovski and Brooks, ; Hartnett, and Wyatt, ). In a similar vein, the association between IPO returns and growth prospects ( GRW ) is not significant.…”

“…We also control for ex ante uncertainty through size (Downes and Heinkel, 1982;Clarkson et al, 1992;How and Yeo, 2001;Chapple et al, 2005;Wyatt, 2014), growth prospects (Lee et al, 1996;How and Yeo, 2001;Hartnett, 2010; amongst others) and floats perceived riskier through their concurrent issue of options as 'sweeteners' (How and Howe, 2001;Dimovski and Brooks, 2004;Wyatt, 2014). We control for under/over subscriptions to account for possible pricing pressure at debut, for example higher first-day prices and thus accentuated underpricing where oversubscription occurs (Argarwal et al, 2006;Hartnett, 2012).…”

“…We control for under/over subscriptions to account for possible pricing pressure at debut, for example higher first-day prices and thus accentuated underpricing where oversubscription occurs (Argarwal et al, 2006;Hartnett, 2012). Possible signals of quality are controlled via float motive/use of funds (Jog and Riding, 1987;Hartnett and R€ omcke, 2000;Ljungqvist and Wilhelm, 2003;Balatbat and Bertinshaw, 2008;Wyatt, 2014), auditor reputation (Titman and Trueman, 1986;Beatty, 1989;Micahely and Shaw, 1995;How and Yeo, 2001;Lee et al, 2003;Wyatt, 2014), underwriter reputation (Beatty and Ritter, 1986;How et al, 1995;Flagg and Margetis, 2008;Sahoo, 2014;Wyatt, 2014) and proportion of vendor/management retained ownership (Leland and Pyle, 1977;Hughes, 1986;Clarkson et al, 1992;Firth, 1998;Lee et al, 2003;Li and McConomy, 2004;Wyatt, 2014). The possible broad impact of the Global Financial Crisis (GFC) upon sentiment is controlled through a dummy 'pre/post-GFC' variable as too are industry effects, given the varying risks and earnings sensitivities of different sectors (Jog and McConomy, 2003;Dimovski and Brooks, 2004;Christensen et al, 2013;Wyatt, 2014).…”

A contemporary view of corporate finance theory, empirical evidence and practice

“…For example, the market penalises those IPO firms that report the use of proceeds for growth activities, because growth activities are associated with greater uncertainty (Wyatt, 2014).…”