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An International Meeting of American Accounting
Association
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Intellectual capital disclosures and the cost of capital: Empirical analysis of underpricing in IPOs |
J - L. Mitchell Van Der Zahn
Singapore Management University/ Curtin University of Technology
Inderpal Singh
Curtin University of Technology
Abstract: This study examines the association between underpricing and intellectual capital (IC) disclosure. Information asymmetry is routinely purported to a determinant of underpricing. Beatty and Ritter (1986) theorize ex ante uncertainty increases when information asymmetry concerns are greater, thereby, leading to higher underpricing. Disclosure is a mechanism that can allegedly ameliorate ex ante uncertainty. We hypothesize that as the level of IC disclosure in an IPO’s prospectus declines the extent of underpricing increases. Contrary to expectations we find based on data from a sample of 334 Singapore IPOs from 1997 – 2004 and after controlling for other signaling mechanisms a positive association between IC disclosure and underpricing. Additional sub-sample analysis shows the positive association holds across the market’s broader industry base, but is strongest amongst ‘IC Intensive’ IPOs. Our findings suggest issuers use IC disclosures as a strategic tool to complement underpricing.