The Impacts Of The Text Features Of Listed Companies' Information Disclosure On IPO Underpricing

From a global perspective,there has been an anomaly in the capital markets of all countries that the issue price is generally lower than the closing price of the first day of IPO listing,which is called IPO underpricing.For a long time,China's IPO underpricing rate has remained high,much higher than the average level of mature capital markets in other countries.It makes investors bear greater market liquidity risks.At the same time,irrational speculation such as speculation by investors has been intensified.IPO underpricing further increases the financial risk caused by the deviation of the stock price from the intrinsic value,that is,the inflated bubble.The report of the 19th National Congress of the Communist Party of China clearly stated that it is necessary to increase the proportion of direct financing,promote the healthy development of multi-level capital markets,and maintain the bottom line of avoiding systemic financial risks.IPO is an important part of the healthy development of the capital market.The rationality and stability of the price of new shares directly affect the financing efficiency of listed companies and the efficiency of the capital market.In this context,the study on China's IPO underpricing is of great significance for improving the resource allocation capacity of the capital market and comprehensively building a modern economic system including the financial system.The quality of information disclosure is crucial to the capital market.Since the IPO company has no trading,the public information that investors can obtain is relatively limited.Therefore,the prospectus is an extremely important information channel for external investors as the normative disclosure materials prepared during the IPO.The narrative information in the prospectus provides potential investors with a large amount of information about the issuance profile,company operations,development positioning,financial status,and risk factors.It is a transcript of the IPO company to show the public its development trend and the management ability.The information contained in the prospectus can be divided into unstructured text information and structured data information.It is worth noting that the textual soft information in the information disclosure has no less impact on asset price changes than the data-based quantitative hard information.Sometimes for investors,textual information is even better than financial data information.There is no clear conclusion about whether the narrative textual information contained in the prospectus will affect the IPO underpricingWith the rapid development of natural language processing,the research of the above problems can be realized by textual analysis technology.I introduce the related theories of IPO underpricing,information disclosure,and behavioral finance.I also summarize the related work about textual information disclosure of listed companies and find that there are few studies about how features of the prospectus affect IPO underpricing.From the three dimensions of text similarity,text readability,and text tone,this study portrays the text features of the prospectus,and then explores whether the above text features will affect IPO underpricing.In particular,this study focuses on Section 4 risk factors of the prospectus and examines the role of this part in the IPO market.I attempt to answer how the information disclosure of listed companies affects the efficiency of the capital market from the perspective of text soft information and the IPO market.Firstly,text similarity is a key index to measure the content of the textual information in the prospectus.The higher the text similarity means the less specific value information.This study analyzes the impact of the textual similarity of the prospectus on IPO underpricing.It is the first time to use a text similarity index to measure the text quality of Chinese prospectus,which overcomes the subjective shortcomings of qualitative analysis or index score.In theory,the negative correlation between the information quality of the prospectus and IPO underpricing is discussed by information asymmetry theory and Shannon's information transmission theory.In empirical research,I take the 2014-2017 Chinese prospectuses as the text analysis object and examine the relationship between the textual similarity of the prospectus and IPO underpricing.The study finds that the higher the similarity of prospectuses text leads the higher the degree of IPO underpricing.This conclusion is still valid after the robustness test.Besides,this conclusion is more significant in the sample of SME and ChiNext.In sum,if the issuer reduces the textual similarity of the prospectus,the information asymmetry between the issuer and the investor has been alleviated,which is manifested in the company's financing costs in the capital market will further decline.Secondly,the readability affects whether investors can accurately understand and reconstruct the information disclosed in the prospectus.This study discusses the impact of the readability of the prospectus on IPO underpricing.From the two dimensions of semantic complexity and word meaning unfamiliarity,I create Chinese financial text readability indexes to more accurately measure investors' understanding and acceptance of the information contained in the prospectus,and further develop the financial text readability research.Theoretically,based on the theory of impression management and information asymmetry,I analyze the influence mechanism of the readability of the prospectus on IPO underpricing.At the same time,empirical research finds the negative relation between the readability of the prospectus and IPO underpricing.This conclusion is still valid after the robustness test.At the same time,the direction and extent of this impact are affected by the proportion of institutional investors' holdings and property rights.In the sample group of high institutional investor's shareholding ratio,the readability of the prospectus has a significant negative correlation with IPO underpricing.The negative correlation between the readability and IPO underpricing is only established in non-state-owned enterprises.Further research shows that the lower the prospectus readability,the higher the turnover rate on the first day of listing.There is a positive correlation between the readability of prospectuses and the financial performance of listed companies.Thirdly,the management tone plays a crucial role in asset price changes as incremental information.This study examines the impact of the tone on IPO underpricing.Based on the characteristics of the Chinese language and financial information disclosure vocabulary,I create a list of emotional vocabulary in Chinese prospectus.Based on the theory of investor irrationality,I clarify the influence mechanism of the management tone of the prospectus on IPO underpricing.The empirical study finds that the net positive tone in the prospectus increased the degree of IPO underpricing.The more positive words used by the management,the higher the degree of IPO underpricing.Negative vocabulary has no significant impact on IPO underpricing.These conclusions will be affected by information transparency,text readability,institutional investors' shareholding ratio,and market sentiment.Further research finds that the management tone in the prospectus is a weak signal of the long-term market performance of IPO,and it does not have a continuous effect.When the managements use more positive words in the prospectus,the IPO performance is more likely to change.The listed companies that pay higher underwriting fees are often accompanied by fewer negative descriptions in the process of external information transmission.The IPO companies that pay higher underwriting fees are often accompanied by fewer negative descriptions in the process of information transmission.Finally,the information disclosure about the risk factor is the most valuable part of the prospectus.This paper studies the potential relationship between the risk information disclosure of the prospectus and IPO underpricing.I describe the textual features of risk disclosure in Chinese prospectus from length and tone,and attempt to investigate the impact of risk information disclosure on IPO underpricing.At the same time,in the expansive analysis,this paper uses the L-LDA model to extract risk topics from the risk factor text.It provides a new method for the realization of automated risk text classification.The study finds that both the scale and the positive tone of the risk information disclosure text significantly increase the level of IPO underpricing.The above conclusion is more significant in the sample group with more reasonable corporate governance structures and larger companies.At the same time,the greater the total number of specific risk items disclosed in the prospectus,the higher the actual first-day yield in the IPO market.Specifically,the number of financial risks and the number of technical risk are significantly positively correlated with IPO underpricing.The number of business risks and the number of other risk entries can play a role in reducing IPO underpricing.These findings mean that although the rational investment awareness of small and medium investors in China has been improved,the risk investment awareness and value investment concept are still relatively weak.This paper makes several contributions.First,it broadens the research boundary of the IPO underpricing theory.This study attempts to explore the mechanism of the influence of the textual information of the prospectus on the phenomenon of IPO underpricing and further expands the relevant research on IPO underpricing from the perspective of information disclosure.Second,I propose a new method for measuring the textual information of the prospectus.Based on the cosine similarity,this paper proposes a new method for calculating the similarity of the prospectus text information.I also create the Chinese financial text readability indexes from the semantic complexity and word meaning unfamiliarity.To measure the tone of the prospectus,I construct a Chinese financial sentiment dictionary.Besides,this paper uses the supervised machine learning L-LDA model to extract the specific risk items in the risk factors of the prospectus.Third,it provides Chinese evidence of how textual information affects asset prices.Taking the prospectus text as the unique research object,this work empirically tests the impact of the textual features of the information disclosure on the IPO performance for the first time and provides effective evidence that qualitative information can affect asset prices.In summary,this paper studies the features of the prospectus and proposes a new method for measuring financial unstructured text information combining with the characteristics of the Chinese financial text.The empirical findings show that the similarity,readability,tone,and risk text characteristics of the prospectus have significant relationships with IPO underpricing.This work has broadened the research scope of Chinese financial text analysis,further enriched the relevant research on IPO underpricing from the perspective of information disclosure.It also provides new ideas for supervisory authorities to improve the information disclosure system.