The Effects of Ambiguous Information on Initial and Subsequent IPO Returns

Authors

  • Tom Arnold,

    1. Tom Arnold is an Associate Professor in the Department of Finance at the Robins School of Business at the University of Richmond, Richmond, VA 23173.
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  • Raymond P.H. Fishe,

    1. Raymond P.H. Fishe is a Professor in the Department of Finance in the Robins School of Business at the University of Richmond, Richmond, VA 23173.
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  • David North

    1. David North is an Associate Professor in the Department of Finance in the Robins School of Business at the University of Richmond, Richmond, VA 23173.
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  • The authors thank the Robins School of Business for generous research support and assistance with purchases of IPO data. We also thank an anonymous referee for many helpful comments as well as Tim Burch, Michael Gombola, Jeff Harris, Xi Li, Jim Overdahl, Michel Robe, George Wang, and seminar participants at the Commodity Futures Trading Commission and the University of Richmond. Eli Bauman, Neil Biller, Jim Geoghegan, and Lili Velinova provided very capable research assistance and data collection. All errors are our own responsibility.

Abstract

Newly public companies must disclose significant risk factors in the offering prospectus. These disclosures are examples of “soft” or ambiguous information. Ambiguity models predict that investors will alter their portfolio weights and react to subsequent signals about such information. We test for these effects in a sample of 1,398 initial public offerings (IPOs) using word count ratios between soft and hard information as measures of ambiguity. We find a significant relationship between the soft information on risk and both initial and ex post measures of returns. These results support the view that soft information embeds ambiguity and that it influences investors’ portfolio choices.

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