Creating Visibility: Voluntary Disclosure by Private Firms Pursuing an Initial Public Offering

Abstract

We draw on Merton (1987) to develop predictions for the benefits of voluntary disclosures made by firms pursuing an initial public offering (IPO) prior to when they begin providing regulated financial information via their IPO prospectus. We find that voluntarily issuing press releases and attending investor and industry conferences prior to filing the IPO prospectus are common disclosure activities. Consistent with Merton (1987), we find that pre-prospectus disclosures are positively associated with information acquisition by prospective investors and coverage by information intermediaries during the IPO filing period. Consistent with these disclosures operating through a visibility channel, we find that while direct associations between pre-prospectus disclosures and IPO pricing and post-IPO adverse selection costs are limited, indirect effects operating through filing-period information acquisition by prospective investors are significant. Overall, our evidence suggests that pre-prospectus voluntary disclosures benefit firms by enhancing visibility with prospective investors and information intermediaries, which ultimately lead to improvements in firms’ information environments and in the pricing of the IPO.

Keywords: voluntary disclosure; initial public offering; press releases; conferences; investor awareness; visibility; information asymmetry

JEL Classification: M4, G14, G32