The Long-Run Role of the Media: Evidence from Initial Public Offerings

The unique characteristics of the U.S. initial public offering IPO process, particularly the strict quiet period regulations, allow us to explore the effects of media coverage when the coverage does not contain genuine news i.e., hard information that was previously unknown. We show that a simple, objective measure of pre-IPO media coverage is positively related to the stock's long-term value, liquidity, analyst coverage, and institutional investor ownership. Our results are robust to additional controls for size, to using abnormal or excess media, and to an instrumental variable approach. We also find that pre-IPO media coverage is negatively related to future expected returns, measured by the implied cost of capital. In all, we find a long-term role for media coverage, consistent with Merton's attention or investor recognition hypothesis. This paper was accepted by Brad Barber, finance.