IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2018-03-9.html
   My bibliography  Save this article

Readability of Initial Public Offering Prospectus and Earnings Performance

Author

Listed:
  • Rachappa Shette

    (Finance, Accounting and Control Area, Indian Institute of Management, Kozhikode - 673 570, Kerala, India)

  • Sudershan Kuntluru

    (Finance, Accounting and Control Area, Indian Institute of Management, Kozhikode - 673 570, Kerala, India.)

Abstract

The present study examines the readability of IPO prospectus in relation to short-term earnings performance and long-term earnings surprise. In this study, Fog Index is the measure of IPO prospectus readability. Cross-sectional regression models are applied on 115 IPOs to examine the effect of readability scores on earnings performance and earnings surprise. Based on empirical analysis, we find positive correlation between Fog index and IPO-year earnings performance. In the short-run, IPO-year earnings performance of companies with difficult to read prospectus is higher than that of companies with easy to read prospectus. In the long-run, the earnings surprise for companies with difficult to read prospectus is higher than that of companies with easy to read prospectus. Unlike the existing studies, application of readability index to IPO prospectus and linking it with short-term earnings performance and long-term earnings surprise is the contribution of the study.

Suggested Citation

  • Rachappa Shette & Sudershan Kuntluru, 2018. "Readability of Initial Public Offering Prospectus and Earnings Performance," International Journal of Economics and Financial Issues, Econjournals, vol. 8(3), pages 68-74.
  • Handle: RePEc:eco:journ1:2018-03-9
    as

    Download full text from publisher

    File URL: https://www.econjournals.com/index.php/ijefi/article/download/6277/pdf
    Download Restriction: no

    File URL: https://www.econjournals.com/index.php/ijefi/article/view/6277/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Cai, Jun & Wei, K. C. John, 1997. "The investment and operating performance of Japanese initial public offerings," Pacific-Basin Finance Journal, Elsevier, vol. 5(4), pages 389-417, September.
    2. Kathleen Weiss Hanley, 2010. "The Information Content of IPO Prospectuses," The Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2821-2864, July.
    3. Jain, Bharat A & Kini, Omesh, 1994. "The Post-Issue Operating Performance of IPO Firms," Journal of Finance, American Finance Association, vol. 49(5), pages 1699-1726, December.
    4. Ball, Ray & Shivakumar, Lakshmanan, 2008. "Earnings quality at initial public offerings," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 324-349, August.
    5. Li, Feng, 2008. "Annual report readability, current earnings, and earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 221-247, August.
    6. Tim Loughran & Bill McDonald, 2014. "Regulation and financial disclosure: The impact of plain English," Journal of Regulatory Economics, Springer, vol. 45(1), pages 94-113, February.
    7. Yen†Jung Lee, 2012. "The Effect of Quarterly Report Readability on Information Efficiency of Stock Prices," Contemporary Accounting Research, John Wiley & Sons, vol. 29(4), pages 1137-1170, December.
    8. Saurabh Ghosh, 2005. "The post-offering performance of IPOs in the Indian banking industry," Applied Economics Letters, Taylor & Francis Journals, vol. 12(2), pages 89-94.
    9. Kim, Kenneth A. & Kitsabunnarat, Pattanaporn & Nofsinger, John R., 2004. "Ownership and operating performance in an emerging market: evidence from Thai IPO firms," Journal of Corporate Finance, Elsevier, vol. 10(3), pages 355-381, June.
    10. Maria C. A. Balatbat & Stephen L. Taylor & Terry S. Walter, 2004. "Corporate governance, insider ownership and operating performance of Australian initial public offerings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 44(3), pages 299-328, November.
    11. Ahmad-Zaluki, Nurwati A. & Campbell, Kevin & Goodacre, Alan, 2011. "Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance," The International Journal of Accounting, Elsevier, vol. 46(2), pages 111-137, June.
    12. Kao, Jennifer L. & Wu, Donghui & Yang, Zhifeng, 2009. "Regulations, earnings management, and post-IPO performance: The Chinese evidence," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 63-76, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Fengyu & Yang, Mozhu & Zhang, Tong, 2023. "Does prospectus readability matter for bond issuance pricing? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andriansyah, Andriansyah & Messinis, George, 2016. "Intended use of IPO proceeds and firm performance: A quantile regression approach," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 14-30.
    2. Ahmad-Zaluki, Nurwati A. & Campbell, Kevin & Goodacre, Alan, 2011. "Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance," The International Journal of Accounting, Elsevier, vol. 46(2), pages 111-137, June.
    3. Alanazi Ahmed & Liu Benjamin & Forster John, 2011. "Saudi Arabian IPOs and Privatized Firms Profitability," Review of Middle East Economics and Finance, De Gruyter, vol. 7(1), pages 67-90, May.
    4. Qian Wang & Duowen Wu & Lina Yan, 2021. "Effect of positive tone in MD&A disclosure on capital structure adjustment speed: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5809-5845, December.
    5. Ren, Siewan & Wright, Anna & Wyatt, Anne, 2012. "Stock option use by Australian IPOs," Journal of Contemporary Accounting and Economics, Elsevier, vol. 8(1), pages 1-22.
    6. Li, Donghui & Moshirian, Fariborz & Nguyen, Pascal & Tan, Li-Wen, 2007. "Managerial ownership and firm performance: Evidence from China's privatizations," Research in International Business and Finance, Elsevier, vol. 21(3), pages 396-413, September.
    7. Ramiro Losada, 2022. "La información pública periódica de los fondos de inversión: como influyen en las decisiones de los inversores," CNMV Documentos de Trabajo CNMV Documentos de Trabaj, CNMV- Comisión Nacional del Mercado de Valores - Departamento de Estudios y Estadísticas.
    8. Jia, Jing & Li, Zhongtian, 2022. "Risk management committees and readability of risk management disclosure," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    9. Cristiana Cardi & Camilla Mazzoli & Sabrina Severini, 2019. "People have the power: post IPO effects of intellectual capital disclosure," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(2), pages 228-255, April.
    10. Natalia Matanova & Tanja Steigner & Bingsheng Yi & Qiancheng Zheng, 2019. "Going concern opinions and IPO pricing accuracy," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 195-238, July.
    11. Chi Duong Thi, 2023. "Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings," SAGE Open, , vol. 13(2), pages 21582440231, June.
    12. Lauren Cohen & Christopher Malloy & Quoc Nguyen, 2018. "Lazy Prices," NBER Working Papers 25084, National Bureau of Economic Research, Inc.
    13. Senave, Elseline & Jans, Mieke J. & Srivastava, Rajendra P., 2023. "The application of text mining in accounting," International Journal of Accounting Information Systems, Elsevier, vol. 50(C).
    14. Fahd Alduais & Nashat Ali Almasria & Abeer Samara & Ali Masadeh, 2022. "Conciseness, Financial Disclosure, and Market Reaction: A Textual Analysis of Annual Reports in Listed Chinese Companies," IJFS, MDPI, vol. 10(4), pages 1-22, November.
    15. Ramiro Losada, 2022. "Periodic public information on investment funds and how it influences investors´ decisions," CNMV Working Papers CNMV Working Papers no. 7, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    16. Lauren Cohen & Christopher Malloy & Quoc Nguyen, 2020. "Lazy Prices," Journal of Finance, American Finance Association, vol. 75(3), pages 1371-1415, June.
    17. Sian Owen & Jo-Ann Suchard, 2013. "The impact of venture capital/private equity investment on the performance of IPOs in Australia," Chapters, in: Mario Levis & Silvio Vismara (ed.), Handbook of Research on IPOs, chapter 19, pages 400-420, Edward Elgar Publishing.
    18. Samuel B. Bonsall & Brian P. Miller, 2017. "The impact of narrative disclosure readability on bond ratings and the cost of debt," Review of Accounting Studies, Springer, vol. 22(2), pages 608-643, June.
    19. Hatem Mansali & Florence Labégorre, 2010. "Les performances économiques et boursières à long terme des sociétés introduites en bourse:le cas du marché français (1990-2003)," Revue Finance Contrôle Stratégie, revues.org, vol. 13(2), pages 67-106., June.
    20. Meisam Omidian & Habibollah Nakhaei & Karim Nakhaei, 2016. "Accounting accruals, earnings management and future performance of IPOs," African Journal of Accounting, Auditing and Finance, Inderscience Enterprises Ltd, vol. 5(1), pages 25-37.

    More about this item

    Keywords

    Firm performance; Readability; Initial Public Offerings; IPO; India;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2018-03-9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.