Kashif Nawaz MB-2E-33

Group Members

 Kashif Nawaz
 Mursaleen Ahmad
 Hafiz M.Omer
Article: The impact of media coverage on IPO
stock performance
Introduction

 This study uses signaling theory to investigate the

following research question:
How does the credibility (i.e., trustworthiness) of the
media and uncertain tone of the media coverage about an
IPO firm influence its stock market performance?
Signaling theory

 Grounded in economics, signaling theory examines how

information asymmetry is reduced between two parties.

 Information asymmetry occurs when one party possesses

more or better information than the other. When
information asymmetry exists, one party (i.e., the
signaler) can transmit signals to another (i.e., the
receiver) to reduce information asymmetry.
Media and signaling theory

 Several studies that use signaling theory showed that

signals do not necessarily have to come from the signaler.

 For example, the literature shows that media, financial

analysts, or other third parties often provide signals about
firms
Media and signaling theory

 Similarly, in this study, the researchers focus is not on

signals provided by IPO firms but rather on signals
provided by the media about IPO firms.

 In this study, parties affiliated to the IPO firm, such as

venture capitalists and underwriters are taken as
media(signaler) to investors about IPO firm quality.
Hafiz M.Omer MB-2E-21
Venture capitalist(Media)

 A venture capitalist is an investor who either

provides capital to startup ventures or supports small
companies that wish to expand but do not have access to
equities markets.
Underwriters(Media)

 Mostly investment banks known as "underwriters", when

a company enters into a contract with a lead underwriter
to sell its shares to the public. The underwriter then
approaches investors with offers to sell those shares.
Underwriters’ role:

 The current study postulates that media coverage about

an IPO firm serves as an important signal that investors
use to form their impression about an IPO firm.

 Media exposure provides information and circumstantial

interpretations to investors and improves the visibility of
the firm.
Credibility/Trustworthiness of Media

 Credibility comprises the objective and subjective

components of the believability of a source or message.

 A receiver of a signal is more likely to believe and agree

with the signal if the source of the signal is considered
trustworthy.

 Credible signals are more powerful in reducing the

effects of information asymmetry.
Methodology

Sample

 This study uses data from all firms that completed an IPO
on the NYSE or NASDAQ during 2006. This procedure
resulted in 97 firms that completed an IPO on the NYSE or
NASDAQ in 2006. Due to missing data from 4 firms, the
final sample size is 93 IPO firms.
Mursaleen Ahmad MB-2E-15
Measures

1. Independent variable
2. Dependent variable
3. Control variables
Independent variable

 An independent variable is the variable that is changed

or controlled in a scientific experiment to test the effects
on the dependent variable.

 In this study, information provided by media to investors

about an IPO firm, is taken as independent variable.
Dependent variable

 A dependent variable is the variable being tested and

measured in a scientific experiment.

 In this study, Stock price of IPO firm, is taken as

dependent variable.
Control variables

 A variable that is held constant in order to assess or

clarify the relationship between two other variables.

 In this study, Firm size, IPO firm age, firm sales prior to
IPO, underwriter reputation, are taken as control
variables.
 Findings

Researchers found that how the credibility of media source and the
uncertainty of the tone of media coverage about IPO firms influence
stock performance.

 Investors don’t want to purchase that IPO firm stocks, whose affiliated
media have lack of credibility or uncertain tone of the media
coverage about that IPO firm.

 So, it largely hurts IPO stock performance.