Based on a textual analysis of initial public offering (IPO) prospectuses, we obtain a number of important findings regarding the relation between the conservatism in prospectuses, IPO pricing, and subsequent operating and stock return performance. First, prospectus conservatism is positively related to underpricing, with the relation more pronounced for technology than nontechnology firms. Second, for nontechnology IPOs, prospectus conservatism is able to predict the firm’s post-IPO operating performance. Specifically, we find that conservatism is inversely related to the firm’s operating performance for the 3 years following the IPO. However, this predictability is limited to nontechnology IPOs. Finally, we find some evidence that for nontechnology IPOs conservatism is inversely related to the firm’s post-IPO abnormal stock return. We conclude that the conservatism contained in an IPO’s prospectus contains useful information about pricing and subsequent operating and stock return performance. Moreover, prospectus conservatism for nontechnology IPOs deserves more attention from investors.

Using a comprehensive sample of U.S. mutual funds from 1992 to 2004, we find strong evidence that investment bank-affiliated funds underperform unaffiliated funds. Consistent with the conflict of interest hypothesis, we find that affiliated funds hold disproportionately large amounts of stocks of their initial public offering and seasoned equity offering clients. Moreover, worse-performing clients are more likely to be held by affiliated funds. Our results are robust to alternative risk adjustments, portfolio weighting schemes, and regression methodologies. Overall, our findings are consistent with the idea that investment banks use affiliated funds to support underwriting business at the expense of fund shareholders.