Does intellectual capital disclosure reduce an IPO's cost of capital? The case of underpricing

Abstract

Purpose

The pivotal aim is to examine the association between underpricing and intellectual capital (IC) disclosures amongst Singapore initial public offerings (IPOs). A secondary aim is to elaborate on the research by Bukh into IC disclosures by Danish IPOs.

Design/methodology/approach

Using a theoretical framework based on the notions of ex ante uncertainty and information asymmetry, the study examines empirically 334 Singapore IPO prospectuses between 1997 and 2004.

Findings

Contrary to theoretical predictions and much of the prior financial disclosure/underpricing research, we find a positive association between underpricing and the extent of IC disclosure. Additional sub‐sample analysis shows that the positive association holds across the market's broader industry base, but is strongest amongst IPOs that are heavily reliant on IC resources.

Research limitations/implications

The research studies Singapore IPOs only, within a specific timeframe (1997‐2004), and concentrates on a single disclosure mechanism (though the one considered most significant to an IPO).

Practical implications

Empirical analysis suggests issuers may not use IC disclosures effectively to reduce their cost of capital. Rather, they use IC disclosures as a strategic tool to complement underpricing. Further, findings suggest policymakers may need to introduce minimal uniform IC disclosure requirements to prevent a speculative IPO market from developing as the significance of IC increases.

Originality/value

Study is the first to provide empirical evidence of the association between IC disclosures and underpricing. Further, it is one of the very first to examine the consequences of IC disclosures and thereby provide a new path for future IC disclosure research.

Citation

Singh, I. and Mitchell Van der Zahn, J.‐.W. (2007), "Does intellectual capital disclosure reduce an IPO's cost of capital? The case of underpricing", Journal of Intellectual Capital, Vol. 8 No. 3, pp. 494-516. https://doi.org/10.1108/14691930710774885