Using Prospectus and IP Information to Evaluate IPO Characteristics and Performance

Anne Wyatt
University of Technology, Sydney
Australia

Abstract:
This study contributes new evidence from a unique data set and setting on the usefulness of the mandatory “proposed use of proceeds” disclosures in the IPO prospectus, for explaining underpricing and post-listing performance. This is the first known study other than Leone, Rock and Willenborg (2007) to provide detailed evidence on this issue. The paper also examines whether capitalized intangible assets and registered intellectual property (patents, trademarks and designs) (IP) are quality signals that help reduce underpricing and provide information about future performance. The results from this study indicate that the “use of proceeds” information is useful for evaluating the level of underpricing and future operating and market performance. Consistent with the theoretical arguments, factors that are important in interpreting the “use of proceeds” and the capitalized intangible assets and IP information are whether or not the company is in the pre-production or production phase and the amount of information provided that relates to the firm’s stock of growth opportunities, concerns relating to free cash flow and corporate governance issues, whether the firm has scale economies and how well the firm performed historically, and adverse selection issues that lead to investor demand for information about the firms’ growth opportunities. The results reveal a number of differences between the “use of proceeds”, and their interactions with intangibles and IP, relations with future operating performance versus future market performance which suggest this information may not be readily interpretable by investors.