Impact of Information Readability on the Effectiveness of Information Disclosure in IPO Comment Letters' Responses
ZHANG Guangli, XUE Huili, GAO Hao
School of Business, Central University of Finance and Economics; School of Finance, Shandong University of Finance and Economics; PBC School of Finance, Tsinghua University
Summary:
High-quality information disclosure plays a crucial role in safeguarding the stable and effective operation of the capital market in the context of China's IPO registration-based system. The IPO inquiry process is an important channel in this system for IPO firms' information disclosure, as their comment letter responses (CLRs) disclose a large amount of unstructured textual information. Therefore, determining the information disclosure effect of IPO inquiry will improve the effectiveness of IPO information disclosure, enhance asset-pricing efficiency and maintain the stability of China's capital market. We investigate the impact of the information characteristics of CLRs on IPO pricing from the perspective of readability using IPO inquiry data from the ChiNext and STAR markets. First, we find that the readability of CLRs is negatively correlated with IPO underpricing, and these findings remain robust to endogeneity concerns. Second, we discuss the mechanism whereby text readability impacts IPO underpricing and conclude that highly readable CLRs can smooth the sentiment of investors in the secondary market, but that the readability of CLRs does not affect IPO price revision in the primary market. These results indicate that the readability of CLRs mainly affects investors' sentiment in the secondary market, which ultimately influences IPO underpricing. Third, we find that the impact of CLRs' readability on IPO underpricing is much greater in subsamples in which executives do not participate in strategic placements than in subsamples in which they do, and where the separation of two rights and the readability of a prospectus is low. Fourth, to examine the heterogeneity of investors' beliefs in the primary market, we test the effect of CLRs' readability on IPO underpricing and conclude that firms with high CLR readability have lower investor belief heterogeneity than those with low CLR readability. Finally, we discuss the long-term impact of CLRs' readability on information disclosure effectiveness from the perspectives of stock price informativeness and negative drift of stock returns after listing. We find that companies with high CLR readability have higher stock-price informativeness and lower negative drift of stock returns in the 90 days and 180 days after listing than those with low CLR readability. Overall, we find that CLR readability significantly affects the information disclosure efficiency of the IPO process. This paper makes two main contributions to the literature. First, it highlights the important influence of textual readability on the effectiveness of information disclosure in the IPO inquiry process. Pre-IPO firms provide little public information for investors. Therefore, information disclosure in the IPO process has an important impact on IPO pricing. Prospectuses and CLRs are two channels whereby IPO firms disclose information under the registration-based system. Improving the readability of CLRs can improve information disclosure efficiency of companies in the IPO process. Second, this paper expands research on the effect of information disclosure of CLRs on the IPO process. CLRs are a unique information disclosure channel in China's stock market, and thus their impact (and the mechanism of their impact) on IPO pricing and investor behavior require further exploration. This paper extends research on the information disclosure effect of CLRs from the perspective of readability and thereby fills a gap in current literature. This paper concludes that there are two ways to improve the information disclosure efficiency of IPO inquiry. First, textual readability should be improved and IPO inquiry strategies and processes should be optimized. Regulators can adopt the strategy of repeated review to identify obscure and plausible information in the IPO inquiry process. This will encourage firms to change their mode of information expression and improve the readability of their information disclosure in IPO inquiry processes. Second, the exchanges can formulate normative documents for information disclosure language and expression of CLRs, which will improve the information disclosure behavior of issuing firms.
张光利, 薛慧丽, 高皓. 文本可读性与IPO审核问询的信息效果检验[J]. 金融研究, 2023, 517(7): 173-192.
ZHANG Guangli, XUE Huili, GAO Hao. Impact of Information Readability on the Effectiveness of Information Disclosure in IPO Comment Letters' Responses. Journal of Financial Research, 2023, 517(7): 173-192.
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