Does risk disclosure reduce the underpricing in IPOs? An empirical analysis of Italian listed companies

Abstract

The objective of this study is to analyze how companies at the time of listing communicate the risk to which they are exposed to investors. To this purpose, a content analysis of the "Risk Factors" section of the prospectuses that companies are required to present in order to be admitted to a regulated market is carried out. The study considers a sample of 65 Italian companies 42 in the period 2012/2013/2014 and 23 in 2018. The choice of these two time periods is dictated by the examination of the possible changes in approaching risk disclosure: we want to test whether there are changes in both quantity and quality of disclosure, also as consequence of the legislator’s attempts to harmonize rules in risk disclosure. The aim is to assess whether the way in which firms communicate the risk to investors can reduce the underpricing of the stock, seen as a consequence of the asymmetric information among the players of the process, in particular between firms (managers) and investors. The thesis is divided into 3 chapters. The first one provides a detailed description of what an IPO is: we explore the reasons that push a firm to go public and the cost that it requires, which actors are involved and their functions during the process and the several pricing methods use to set the price. The IPO’s description is followed by the definition of underpricing phenomenon and the theory of asymmetric information. The second chapter examines the literature on risk communication, both from a purely "narrative" point of view and from the point of view of the results obtained by academic scholars who have carried out the same study in different national contexts. The evolution of the European regulation is then analyzed, in particular in relation to the Prospectus document and the risk factor section. The third chapter describes the hypotheses, methodology of content analysis and the econometric model. In particular, the content analysis is clearly presented and the variables described (Volume, Type, Tone, Perspective and Completeness). The last section of the chapter presents descriptives statistics and statistics results. At the end, we draft conclusions of this study.