The Post-IPO Dynamics of Investor Trust in Corporate Disclosure

This study examines the development of investor trust in corporate disclosure during a time in a firm’s life when this matters most: at and after its initial public offering (IPO). Analyzing a sample of 3,202 US IPOs between 1985 and 2013, we provide evidence of two key features of investor trust. First, investor trust development is incomplete at the IPO and hence continues after the IPO. In particular, we find that (a) the variance of investors’ disclosure credibility perceptions across firms increases during the five-year post-IPO period and (b) firm-specific post-IPO trends in perceived disclosure credibility correlate with credibility signals known to investors at the IPO. Second, post-IPO trends and innovations in analyst coverage and institutional ownership correlate with trends and innovations in perceived disclosure credibility. Thus, analysts and institutional investors act as facilitators of investor trust in corporate disclosure after the IPO. Collectively, our findings shed light on the time-consuming nature of investor trust development and document a previously unexplored role for analysts and institutional investors.