The Disclosure of the Intended Uses of Proceeds and Aftermarket Trading Volume

Abstract

This study aims to provide empirical evidence to support the idea of signaling in a situation with high information asymmetry. We attempt to understand how IPO issuer’s expectation on its aftermarket trading volume may affect its disclosure decision of the intended use of proceeds. The sample consists of IPOs between January 1, 2000 and December 31, 2019 from 5 countries, including Australia, Indonesia, Philippine, Singapore, and Thailand.

By using the expected turnover estimated from 3 approaches, we find empirical evidence suggesting that IPO issuers with low expected aftermarket turnover tend to disclose highly detailed information on the uses of proceeds. They strategically provide clearly identified purposes in the hope of improving trading volume in the aftermarket.

We also examine the capital market consequence of the disclosure on the actual aftermarket turnover. Nevertheless, we find no convincing evidence that the increased disclosure of the uses of proceeds leads to the greater trading turnover in the aftermarket. We conclude that the information may already be adsorbed during the subscription period and the issuing firms with specific plans to do with proceeds are high-growth potential firms, hence, investors who were allocated IPO shares may sell out less shares once shares are listed. Moreover, we provide plausible explanation that investors perceive differently to each use-of-proceeds item.