Will Negative Textual Tone of Initial Profit Offering (IPO) Prospectus Affect Price Stabilisation? Evidence from Hong Kong

Abstract

Initial Public Offerings (IPOs) are featured with information asymmetry and aftermarket price volatility. The IPO prospectus can be a proper channel for issuing companies to convey information to underwriters and investors during IPO events, and potentially influence the level of information asymmetry and stock price volatility. We examine the association between the textual tone of IPO prospectus and price stabilisation in Hong Kong stock market from 2004 to 2021. Using a large sample of 1,185 IPOs, we find empirical evidence showing a positive relationship between price stabilisation and the negative textual tone in prospectus. This finding suggests that when more negative textual tone is implied in IPO prospectus, underwriters will stabilise more. Our results consider possible endogenous issues and perform a battery of robustness tests.