Abstract
Newly public firms may provide misleading information about their business plans in their initial public offering (IPO) prospectuses. Using textual analysis, we develop a simple measure of such misleading information based on the difference between the emphasis placed on business lines in the main textual description and the corresponding information from the accounting tables. We examine our measure of misleading information using a sample of 1878 IPOs in China from 2010 to 2019. We find that the degree of misleading information is greater when firms find it more difficult to get regulatory approval for an IPO. Furthermore, the amount of misleading information is greater for firms with higher leverage and more segmented businesses. We also find some evidence that the stock returns of firms which present a greater amount of misleading information are lower.
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Notes
The Growth Enterprise Board is a special set of IPO requirements for the firms that do not meet IPO requirements of the Main Board. Most of firms listed on the Growth Enterprise Board have great growth potentials and innovation capability. The Growth Enterprise Board can be roughly viewed as the Nasdaq for China.
The Sci-Tech Innovation Board is also a special set of IPO requirements for firms that do not meet IPO requirements of the Main Board. There are many policy innovations in the Sci-Tech Innovation Board, including the registration-based initial public offering (IPO) system, price limitation cancelation in IPO day, the stricter Delisting System and mainly for high-tech firms.
We use a webcrawler to download all prospectuses from http://www.cninfo.com.cn.
CSRC suspended all IPOs in 2013.
The suspension was due to poor stock market returns in 2012 and too much volatility in the market. Furthermore, the turnovers in the top officials of CSRC also contributed to the suspension.
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Acknowledgements
We are grateful for the valuable comments from the editor, Cheng-Few Lee, two anonymous referees, and participants at the 28th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management and the 14th NCTU International Finance Conference. Xinjie Wang acknowledges financial support from the Southern University of Science and Technology (Grant Nos. Y01246210, Y01246110).
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Appendices
Appendix 1
Appendix 2
To better understand the semantic emphasis difference among words in the Extreme, Very, More and Negative groups, we list some examples in the Table 11 in this appendix. Admittedly, even with the most precise translation, readers in the different language systems (who are not familiar with the institutional details in the IPO process in China) may not be able to fully capture the semantic differences for the words in different groups. The semantic emphasis of words or phrases, such as “Core”, “Efficient”, “Vigorous”, “First class” could be easily understood by direct translation. However, words, such as “Consistently”, “Plenty of”, “Firstly”, may not be straightforward to be understand as easy as the Extreme emphasis words, and also for the words, “Steadily”, “Progressively”, “Smoothly”, “Favourable”, “Ameliorate”, and “Widely”. We manually read the IPO prospectuses and find that words like “Consistently” described the main business usually deliver the strong positive sentiments. For example, although word “Firstly” means that “used to refer to the first thing in a list” in the dictionary, in IPO prospectuses, it is usually used to express that the business firstly made certain achievements compared with other national or globally competitors. In English dictionary, “Consistently” means “in a way that does not change”, but in prospectuses, it is usually used to express that the demands for the business is consistently growing or the production capability is consistently increasing, delivering strong positive sentiment. Alternatively, literally the word may not directly express the sentimental emphasis, but empirically the word in prospectus contains the strong sentiments. Indeed, it may say that words, such as “Consistently”, “Extremely”, or “Substantially”, also could be used to describe negative sentimental words. However, to get IPO approval from CSRC, firms typically use strong sentimental adjunct words to describe their main business in their IPO prospectuses. In addition, to ensure the precision of machine reading, we use Jieba, the Chinese text segmentation module, to cut text and count the main business words and emphasis adjunct words in the four groups. With input of the all business and adjunct words, the module could preciously identify the target words.
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Ma, W., Wang, X., Wang, Y. et al. Measuring misleading information in IPO prospectuses. Rev Quant Finan Acc 57, 819–843 (2021). https://doi.org/10.1007/s11156-021-00964-7
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DOI: https://doi.org/10.1007/s11156-021-00964-7