Excessive initial trading day returns (termed underpricing (UP)) and poor long‐run performance (LRP) are two well‐documented anomalies associated with initial public offerings (IPOs).The primary objective of this study is to empirically test the association between the extent of intellectual capital (IC) disclosure in the prospectus of an unseasoned IPO and: UP and LRP.
Ex ante uncertainty surrounding IC – recognized as the pivotal resource underlying a firm's future value creation and sustainable competitive advantage in the “new economic” era – is likely to be high. Unseasoned IPOs world‐wide are increasing with many IPOs heavily IC‐reliant. Given ex ante uncertainty surrounding IC, there is an escalating need to understand how disclosure of information related to IC can reduce an IPO's cost of capital (i.e. UP) and provide an indication of LRP. The analysis is based on a sample of 228 Singapore IPOs listing during the period 1997‐2003. IC disclosure (ICDisc) in IPO prospectuses is measured using an 81‐item researcher constructed disclosure index.
Empirical findings indicate, contrary to expectations, a positive (negative) ICDisc‐UP (ICDisc‐LRP) association.
It is the opinion that regulators, scholars and practitioners alike need to pay attention to developing a responsible model for reporting IC information so as to prevent a potentially unhealthy speculative environment driven by over‐optimism.
The study is the first to simultaneously investigate the linkage between ICDisc and UP and: LRP.
