IPO PROSPECTUS ANALYSIS

The prospectus is a vital document in the initial public offering (IPO) process for firms. It serves as a detailed guide that investors use to evaluate the company and its shares. According to signaling theory, certain characteristics of the prospectus—such as its length, how easy it is to read, the amount of visual content, and the overall tone—can influence how investors perceive the value of the IPO.

This study finds that IPOs with longer prospectuses and a negative tone are linked to higher underpricing one day after the IPO. Underpricing means that shares are sold for less than their true market value, which often happens when investors are uncertain about the company's worth. In contrast, having more visual content in the prospectus is associated with lower underpricing, suggesting that visuals can enhance the attractiveness of the IPO. Interestingly, the ease of reading and a positive tone do not significantly affect underpricing.

Furthermore, the effect of sentiment on underpricing lessens over time. This indicates that while the tone of the prospectus may impact initial investor reactions, its importance diminishes as time goes by.

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