THE IMPACT OF PROSPECTUS CONSERVATISM ON SHARE PRICE AND OPERATING PERFORMANCE: EVIDENCE FROM HONG KONG.

Abstract

This paper examines how prospectus wording is related to IPO pricing. More specifically, it finds the impact of adopting a more conservative tone in the risk section of a prospectus on the IPO pricing. Simultaneously, the paper also investigates whether prospectus wording is revealing of the future performance of the firm. The sample includes 829 firms, listed on the Hong Kong Stock Exchange between April 1, 2003 and December 31, 2017. After controlling for multiple firm and issue specific, as well as market specific factors, the results reveal that a higher level of conservatism in the prospectus is significantly associated with more underpricing. Further, the adoption of a conservative tone in the prospectus is also negatively related to the future operating performance of the firm.