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Does risk disclosure in prospectus matter in ChiNext IPOs’ initial underpricing?

Author

Listed:
  • Monica Hussein

    (California State University)

  • Zhong-guo Zhou

    (California State University)

  • Qi Deng

    (Xi’an Jiaotong - Liverpool University)

Abstract

Using a unique and hand-collected dataset, we investigate the impact of the risk factors disclosed in the prospectuses on the initial returns for ChiNext IPOs. After controlling for the market-, firm- and offer-specific characteristics, we identify several significant risk factors that include “policy changes on taxation or government subsidy”, “higher depreciation and/or amortization due to proposed capital expenditures”, “ongoing litigation or lawsuit”, and “piracy or trademark infringement”. Concerns for ongoing litigation risk seem to be most important as the risk affects both the opening and closing price returns positively and significantly, indicating risk compensation through deep underpricing. The other three risk factors only affect the closing price return. Similar to the impact from the ongoing litigation or lawsuit risk, the trademark infringement risk affects the closing price return positively. On the other hand, the risks associated with possible policy changes on taxation or government subsidy and higher depreciation and/or amortization due to proposed capital expenditures have negative impacts on the closing return. In line with our conjecture of a short-term equilibrium, none of the risk factors disclosed in the prospectuses are found significant for the 21st trading day (monthly) initial return.

Suggested Citation

  • Monica Hussein & Zhong-guo Zhou & Qi Deng, 2020. "Does risk disclosure in prospectus matter in ChiNext IPOs’ initial underpricing?," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 957-979, April.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:3:d:10.1007_s11156-019-00812-9
    DOI: 10.1007/s11156-019-00812-9
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    References listed on IDEAS

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    Cited by:

    1. Deng, Qi & Dai, Lunge & Yang, Zixin & Zhou, Zhong-Guo & Hussein, Monica & Chen, Dingyi & Swartz, Mick, 2023. "The impacts of regulation regime changes on ChiNext IPOs: Effects of 2013 and 2020 reforms on initial return, fair value and overreaction," International Review of Financial Analysis, Elsevier, vol. 89(C).
    2. Hesham Bassyouny & Tarek Abdelfattah, 2022. "Executives vs. governance: Who has the predictive power? Evidence from narrative tone," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 361-382, January.
    3. Waqas Mehmood & Rasidah Mohd-Rashid & Yasir Abdullah & Ataul Karim Patwary & Attia Aman-Ullah, 2023. "Inclusive mapping of initial public offerings: a bibliometric and literature review study," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(1), pages 655-700, February.
    4. Yang, Baohua & Zhou, Yingluo & Zhou, Zhong-Guo, 2022. "Strategic behavior of insiders in initial underpricing and long-run underperformance," Emerging Markets Review, Elsevier, vol. 53(C).
    5. Boulton, Thomas J., 2023. "Property rights and access to equity capital in China," Global Finance Journal, Elsevier, vol. 55(C).
    6. Zhou, Zhong-guo & Hussein, Monica & Deng, Qi, 2021. "ChiNext IPOs' initial returns before and after the 2013 stock market reform: What can we learn?," Emerging Markets Review, Elsevier, vol. 48(C).

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    More about this item

    Keywords

    IPO initial underpricing; Market-; firm-; and offer-specific characteristics; Risk exposures in ChiNext IPOs’ prospectuses; Model specification;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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