Use of Proceeds Disclosure and IPO Underpricing

Can specific use of proceeds explain underpricing in the pre- and aftermarket? Exploiting a unique regulatory design, we answer this question by using a sample of 258 Indian initial public offerings (IPOs). We document that specific use of proceeds increases actual voluntary underpricing in the premarket and reduces overpricing in the aftermarket. The premarket effect is pronounced for firms with greater information asymmetry whereas the aftermarket effect is pronounced for firms with higher investor sentiment. Our findings are robust to tests that mitigate concerns about endogeneity. Collectively, we show that disclosure impacts underpricing differently in the pre- and aftermarket