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Litigation risk, strategic disclosure and the underpricing of initial public offerings

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Author Info

  • Hanley, Kathleen Weiss
  • Hoberg, Gerard

Abstract

Using word content analysis on the time-series of IPO prospectuses, we show that issuers tradeoff underpricing and strategic disclosure as potential hedges against litigation risk. This tradeoff explains a significant fraction of the variation in prospectus revision patterns, IPO underpricing, the partial adjustment phenomenon, and litigation outcomes. We find that strong disclosure is an effective hedge against all types of lawsuits. Underpricing, however, is an effective hedge only against Section 11 lawsuits, those lawsuits which are most damaging to the underwriter. Underwriters who fail to adequately hedge litigation risk experience economically large penalties, including loss of market share.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 103 (2012)
Issue (Month): 2 ()
Pages: 235-254

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Handle: RePEc:eee:jfinec:v:103:y:2012:i:2:p:235-254

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Litigation risk; Initial public offerings; Initial returns; Partial adjustment; Strategic disclosure;

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References

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Cited by:
  1. Loughran, Tim & McDonald, Bill, 2013. "IPO first-day returns, offer price revisions, volatility, and form S-1 language," Journal of Financial Economics, Elsevier, vol. 109(2), pages 307-326.

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