Sentiment of prospectus and IPO underpricing : how textual analysis can explain IPO Underpricing phenomenon

IPO Prospectus is one of the most important and informative documents filed by issuers with the Securities and Exchange Commission. Performing textual analysis of such document allows to understand issuers’ perspective on the future of their company. In our research we show that while sentiment of the entire document could be not that useful, the analysis of certain parts of it can help understand underpricing. Basing our work on Ferris, Hao and Liao (2012), our approach was to consider the pull of US IPOs over the last 3 years. Having controlled for firm specific characteristics, we find that negative sentiment in the Risk Factors Section is positively related to 1st day underpricing. Moreover, we find a significant relation for a longer period underpricing - 6 months.