Ambiguous Signals and Information Asymmetry in the Initial Public Offering Process: Examining Ownership Concentration, Process Time, and Underpricing

Abstract

Initial public offerings (IPOs) represent an important stage of development for many firms as they try to gain access to the resources needed for growth and development. Due to the information asymmetry that accompanies the process, there is extensive research examining what factors might signal quality to potential investors such that the IPO might be more optimally valuated and priced. Herein, we hypothesize and empirically explore how a mixed or ambiguous signal about a firm—the signal of ownership concentration in this case—might be overcome with more opportunities for information disclosure and, thus, lessen underpricing; IPO stocks tend to be underpriced (i.e., the offer price of a stock is lower than the inherent market value), which means that owner’s “leave money on the table.” Using a generalized structural equation model of data on 601 U.S. IPO firms, we find support for our model by demonstrating that longer IPO process times (i.e., days from the IPO firm’s filing date to the actual issue date)—representing opportunities to disclose and disseminate information—act as a mediator between ownership concentration and underpricing. Further, we show that the age of the firm also influences this process model arguing that more historical data and other information is more readily available to the potential investor with increased firm age. Overall, our study contributes to the literature by demonstrating how more disclosure and dissemination of relevant information might reduce asymmetries associated with more ambiguous or difficult-to-interpret signals and improve outcomes.