This paper explores the potential marketing benefits of going public and of IPO underpricing. We examine the impact of IPO underpricing on website traffic, which is a direct measure of product market performance for internet firms. If underpricing attracts media attention and creates valuable publicity, we expect an increase in web traffic following the IPO. We find that web traffic growth in the month after the IPO is positively and significantly associated with initial returns, and the effect is economically significant. We also investigate media reaction to initial returns for a broader sample of IPOs. The results suggest that the marketing benefits of underpricing extend beyond the internet sector and the “hot issues” market of the late 1990s.

ABSTRACT We explore the factors associated with historical IPO failures by developing an IPO failure prediction model that includes accounting information as well as proxies for the role of information intermediaries and other IPO deal–related characteristics. We document statistically significant differences in failure models applicable to nontech versus high tech IPOs, and these structural differences are largely driven by accounting‐based proxies for firms' investments in intangible assets, operating performance, and financial leverage. We also develop parsimonious, predominantly accounting‐based, strictly out‐of‐sample (i.e., no hindsight) IPO failure forecasting models for each of the two sectors. We find that our forecasts are negatively associated with one‐year post‐IPO abnormal returns. A pseudo‐hedge strategy of going short (long) in high (low) failure risk portfolios yields returns of economically significant magnitudes over the one‐year horizon, and is robust to alternative returns methodologies. Further results suggest that IPO long‐run returns anomalies may persist, but they take different forms for high‐tech and nontech IPOs.

Management-issued linguistic tone is, on average, positively associated with future earnings and incrementally priced by the market. However, prior capital markets research also shows that linguistic tone is difficult to process, while lab-based findings establish that less sophisticated investors are more susceptible to the use of heuristics in their interpretation of tone. Taken together, these findings motivate us to examine whether investors disagree on the valuation implications of linguistic tone and whether small investors are subject to differential, and notably less efficient, trading in response to the linguistic tone in these corporate announcements. We measure “residual tone” (i.e., that portion of linguistic tone that is not associated with contemporaneous economic news or current valuation fundamentals) for a sample of publicly-released management forecasts. We find that abnormal trading volume is increasing in the residual tone of management forecasts after controlling for the price reaction to forecasts, suggesting that there is significant investor disagreement over the implication of this tone for firm value. Further tests show that the net buying behavior of small investors is positively associated with residual tone, while larger investors tend to sell on this signal. The negative relation between residual tone and future stock returns found in prior work on earnings announcements holds in our sample of management forecasts as well, implying that this differential buying behavior involves an economically significant wealth transfer from small to large investors. We show in an extended analysis that any success that might accrue to small investors from trading positions taken during the event period is decreasing in residual tone.

We examine whether the change in earnings announcement textual tone, aggregated across individual publicly traded firms, helps predict gross domestic product (GDP) growth. The literature finds that changes in aggregate accounting earnings do help predict GDP growth, but only when aggregate earnings changes are negative. Because conservative accounting rules limit managers' ability to communicate positive news promptly, we examine the tone of quarterly corporate earnings announcements as a possible source of timely positive information provided by firms. We find that the change in aggregate tone in the earnings announcements from the same quarter in the previous year predicts one‐quarter‐ahead GDP growth, but only when the change is positive. Our study contributes to the literature by investigating the relation between aggregate corporate disclosure tone and macroeconomic outcomes.