Disclosure of Use of Proceeds, Real Effects and Underpricing in Private Equity-Backed Initial Public Offerings

Abstract

This paper provides the first empirical investigation of the information content of use of proceeds disclosure in private equity (PE)-backed initial public offerings (IPOs). We find evidence consistent with the idea that PE-backed issuers primarily use the IPO as a means of repaying claimholders. PE-backed issuers that state ‘repay debt’ as the use of proceeds occur frequently in our sample. These issuers have high ex-ante leverage ratios and use the IPO proceeds to revert to more normal leverage ratios after the IPO. This finding suggests that PE ownership only leads to a temporary increase in optimal leverage ratio. Further results indicate that the overwhelming importance of repaying claimholders in PE-backed IPOs has negative ripple effects on the implementation of other stated use-of-proceeds categories such as R&D. Finally, we document that the certification effect of PE-backing mitigates the adverse impact of vague use of proceeds on underpricing. Hence, in PE-backed IPOs there is no costly tradeoff between higher underpricing due to vagueness and the risk of revealing proprietary information due to specificity