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Does equity underpricing affect voluntary disclosure?


I investigate whether equity underpricing affects the frequency and tone of voluntary corporate disclosures. In periods of potential underpricing driven by mutual fund redemptions, managers have conflicting incentives: to provide value-relevant information about the firm in an attempt to correct the underpricing or to remain silent and exploit the underpricing for their own advantage. To capture the full extent of managers’ disclosure behavior, I evaluate several forms of management communication including the number of forecasts issued and the number of disclosures later reported on Form 8-K filings with the SEC. To gain further insight into managers’ intentions, I also consider the information content of the forecasts. The findings suggest that managers respond to underpricing by issuing an increased number of earnings forecasts and by providing more voluntary information in the 8-K filings. Further, the overall tone of the information in the 8-K filings is more positive. The increase in disclosure cannot be attributed to changes in investment activity, litigation risk, or CEO compensation sensitivity. These results are consistent with the notion that managers respond to equity underpricing by providing additional information to market participants.

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