Seasoned Equity Issuers’ Prospectus Filings: How Informative is their Tone? Rongbing Huang, Hong Qian, and Santhosh Ramalingegowda
Coles Working Paper Series, FALL20-05, November 2020
Overview In the United States, a public company may follow its initial public offering (IPO) with what is termed a seasoned equity offering (SEO) of shares to raise more money. First, it must file Form S, the preliminary prospectus, and Form 424B, the final prospectus, with the Securities and Exchange Commission. In this paper, we use textual analysis to identify uncertainty words (e.g., may, approximately, believe, risk), weak modal words (a subset of the uncertainty words, e.g., may, might, could), and negative words (e.g., loss, adverse) in the prospectus filings of a sample of SEOs from 1998 to 2016. We find that a weak modal tone in the final prospectus filing is positively related to the discounting of the offer price relative to the stock price on the day before the offer and negatively related to the offer-day stock return. For example, a one- standard-deviation increase in our measure of weak modal tone in is associated with a 0.50-percent increase (e.g., from 3.67% to 4.17%) in the offer-price discount. An increase in cautionary tone from the S filing to the 424B filing is associated with abnormally lower stock returns for several days after the offer. Overall, our findings suggest that using a cautionary tone in a firm’s SEO prospectus filing casts a significant negative light on the firm and is followed by a lower stock return.
26 | Working Papers
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