Investor awareness or information asymmetry? Wikipedia and IPO underpricing

• Published date: 01 August 2021
• Author: Thomas Boulton,Bill B. Francis,Thomas Shohfi,Daqi Xin
• Date: 01 August 2021
• DOI: http://doi.org/10.1111/fire.12276

DOI: 10.1111/fire.12276

PAPER SUBMITTED FOR REVIEW

Investor awareness or information asymmetry?

Wikipedia and IPO underpricing

Thomas Boulton1Bill B. Francis2Thomas Shohfi2Daqi Xin3

1Farmer School of Business, Miami University,

Oxford, Ohio, USA

2Lally School of Management, Rensselaer

PolytechnicInstitute, Troy, New York, USA

3Nankai Business School, Nankai University,

Tianjin, China

Correspondence

ThomasShohfi, Lally School of Management,

RensselaerPolytechnic Institute, Pittsburgh

Bldg,110 8th St, Troy,NY 12180, USA.

Email:shohft@rpi.edu

Abstract

We use the presence of a Wikipedia article for initial public

offering (IPO) firms to test theories of information asymme-

try and investor awareness. Although we find limited sup-

port for the former, our results provide strong support for

theories of investor awareness. Specifically, IPO firms with

a Wikipedia article exhibit significantly higher underpric-

ing and offer price revisions than do IPO firms without a

Wikipedia article. Investorawareness has positive long-term

effects, including greater analyst following and institutional

ownership for up to 3 years after the offering. The effect is

robust to firm-specific Google search volume, news cover-

age, retail trading intensity,social media activity, propensity

score matching, and an instrumental variable approach.

KEYWORDS

initial public offerings, investor attention, underpricing, Wikipedia

JEL CLASSIFICATION

D82, G14, G24, G32

1INTRODUCTION

The manner in which the world consumes information has changed dramatically since researchers began studying

initial public offering (IPO) underpricing (Ibbotson, 1975; Logue, 1973). Possibly,no invention since the television in

the 1920s has done more to democratize the availabilityof information than the Internet. In recent years, the Internet

has evolved from a medium to consume information passively to a place where users collaborate to create content.

There is perhaps no better example of this collaborative effort than Wikipedia, the leading free online encyclopedia

where anyone can create and edit content.

As private companies or subsidiaries of public companies, information about IPO firms is often limited. For many

potential investors, the issuer’s carefully crafted registration statement is the primary source of information used to

Financial Review. 2021;56:535–561. wileyonlinelibrary.com/journal/fire ©2021 The Eastern Finance Association 535

536 BOULTONET AL.

evaluate the IPO as an investment opportunity. Federal securities laws limit the information that issuers and their

representatives can share with the public between the time the registration statement is filed and declared effective

by the U.S. Securities and Exchange Commission (SEC).1However, these limitations do not apply to the collabora-

tive efforts of the Wikipedia community,which makes Wikipedia a potentially valuable source of information for IPO

investors.

Wikipedia ranks among the 10 most popular Web sites in the United States and is the world’s leading online ref-

erence source.2Despite Wikipedia’s potential importance as a source of information for investors, its impact on IPO

firms is an unexplored issue. However,evidence suggests that potential investors reference a company’s Wikipedia

article around its IPO. Toillustrate, we report mean traffic for Wikipedia articles for 30 days around IPO filing and

issuance dates in Figure 1. Panel a indicates a 45.4% increase in article views at the IPO filing date relative to the 30-

day mean. Panel b shows a much larger traffic increase of 143.2% on the IPO issuance date that continues into the

following day (70.46% increase). These results motivate us to examine the impact of Wikipedia on IPO pricing and

long-run outcomes.

We contend that Wikipedia could impact interactions between IPO issuers and the investmentbanks they employ

(Baron, 1982), IPO issuers and potential investors (Welch, 1989), and different investor groups (Rock, 1986). Infor-

mation disparities make it difficult to precisely price a firm’s IPO (Bradley et al., 2004) and are believedto contribute

to underpricing that results in the large first-day gains exhibited bymany IPOs (Ljungqvist, 2007). The economic con-

sequences of these information effects are significant. For instance, Ritter (1987) and others find that underpricing is

the largest single cost of going public for the majority of IPO issuers.

Wikipedia also has the potential to increase investor attention to IPO firms. Prior research finds that stock prices

do not fully reflect value-related information until the information grabs investor attention (Frederickson& Zolotoy,

2016; Hirshleifer et al., 2004; Hong et al., 2007). Recent studies show that the media plays an important role in the

information environment of capital markets (Bhattacharya et al., 2009; Engelberg & Parsons, 2011;Fang&Peress,

2009;Tetlock,2007). The manner in which investors obtain information from Wikipedia, however, differs from tradi-

tional and social media. The latter are “pushed” to investors through newspapers and online platforms, whereas infor-

mation from Wikipedia is typically “pulled” (i.e., it is specifically sought out). For example, according to SimilarWeb,

85.89% of Wikipedia’s traffic is from active searching.3Consistent with the idea that Wikipedia is related to investor

attention, we find that the presence of a Wikipedia article is positively correlated with measures of investor attention

previously considered in the literature, including news coverage(Liu et al., 2014) and StockTwits activity (Cookson &

Niessner, 2020). However, multivariate analysis indicates that much of the variation in the presence of a Wikipedia

article is not explained by other measures of investor attention. Thus, we posit that the presence and content of a

Wikipedia article could have an incremental effect on IPO outcomes due toWikipedia’s impact on investor attention.

Wefind that firmswith a Wikipedia article when they go public (hereafter Wikipedia firms) experience significantly

higher underpricing than firms without a Wikipedia article (21.0% vs. 12.7%). The association between the existence

of and number of visits to a Wikipedia article and IPO underpricing is also evident in multivariate regressions that

control for firm- and issue-related factors that have been shown to affect underpricing, and to a variety of robustness

checks including controlling for abnormal firm-specific Google search volume (Da et al., 2011), social media activity,

and news outlet intensity around the IPO. Additionally, we employ instrumental variable regression and propensity

score matching methods. Our results consistently point to a statistically significant and economically large positive

relation between the presence of a pre-IPO Wikipedia article and IPO underpricing. Because this is inconsistent with

the notion that a Wikipedia article reduces information asymmetry, we drawon prior research on investor attention

to explain whyWikipedia firms tend to experience greater IPO underpricing.

1https://www.sec.gov/fast-answers/answersquiethtm.html

2http://www.alexa.com/siteinfo/wikipedia.org

3https://www.similarweb.com/website/wikipedia.org#search(as of July 2, 2019)