Outperforming markets: IC and the long-term performance of Japanese IPOs

Abstract

This article studies the effects of disclosure practices of Japanese IPO prospectuses on long-term stock performance and bid–ask spread, as a proxy for cost of capital, after a company is admitted to the stock exchange. A disclosure index methodology is applied to 120 IPO prospectuses from 2003. Intellectual capital information leads to significantly better long-term performance against a reference portfolio, and is thus important to the capital market. Further, superior disclosure of IC reduces bid–ask spread in the long-term, indicating that such disclosures are important in an IPO setting. Analysts and investors can attain higher long-term returns by understanding IC.

Keywords:

• Voluntary disclosures
• Intellectual capital
• IPO prospectuses
• Long-term performance
• Bid–ask spread
• Japan

Abbreviations:

• METI
• Ministry of Economy, Trade and Industry
• IAbM
• Intellectual Asset-based Management
• GIPID
• Guideline for Intellectual Property Information Disclosure

Notes

2 In book building, the underwriter seeks indications of interest from investors and sets a minimum and maximum price for the IPO. Institutional investors submit nonbinding price and quantity indications to the underwriter. The underwriter, in selecting the final offer price, can accept the quantity indications above the price and sells any remaining shares to the public (Kutsuna, Smith & Smith, 2009, pp. 1130–1140).

3 Jay Ritter's website contains a multitude of background information on global IPOs and background statistics. See: http://bear.warrington.ufl.edu/ritter/

4 In 2003 there were 120 IPOs on the Tokyo Stock Exchange, while the average of the 20 year period from 1987 to 2006 was 118.

5 In 2003 the average level of underpricing was 45.1% on the Tokyo Stock Exchange, while the average of the 20 year period from 1987 to 2006 was 38.3%.