The information value of the thematic content of IPO prospectus.

Details

Supervisors

Thewissen, James

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

IPOs are known for being systematically underpriced. Prior research tried to link the underpricing to quantitative factors, the tone of words in IPO prospectuses, and how they are disclosed. However, underpricing still seems to be misunderstood. In this paper, we take a new approach by using a topic modeling method, Latent Dirichlet Allocation (LDA), to identify the thematic content of IPO prospectuses and see if the underpricing can be impacted by what is disclosed in these documents. We employ a sample of 1,155 IPO prospectuses that occurred between 1996 and 2021 with their corresponding financials and stock market data. We first show that the most elaborated topics in prospectuses are related to the shares and their characteristics. We show that the identified topics help to explain the underpricing, as it improves our model quality. In a second step, we discuss what topics matter to explain and increase the underpricing. We find that Trading Activities related topic has a positive and significant effect on underpricing. In contrast, Common Shares, Risk, Number of Shares, Strategic Alliances, and Result Statement related topics have negative and significant effects. Overall, we conclude that IPO prospectuses’ thematic content helps explain the underpricing but generally decreases it as there is less asymmetric information. This paper shows that IPO prospectuses should be used more carefully by investors and managers as they contain valuable information which can predict underpricing and identify the potential return behind an IPO.