Facial expression during IPO roadshow and post-IPO performance

To raise capital, firms actively convey favorable information to investors during IPO (initial public offering) roadshows. Although IPO roadshows are an important way for investors to acquire information, some of the prospectuses that are the basis of these roadshows are deceptive and misleading. The chairmen of the firms know the truth, however, and they may inadvertently reveal it during their roadshow speeches. Social psychology theory proposes that individuals who intentionally provide false information generate negative emotions that could show in their facial expressions. Based on this, we use face-reader software to analyze chairmen's facial expressions during IPO roadshows to infer whether they are lying about firm performance. We collect videos of IPO roadshows for firms listed on the Growth Enterprise Market (GEM) from 2009 to 2014 to test the relationship between chairmen's negative emotions in IPO roadshow speeches and post-IPO corporate performance. A large number of studies in social psychology propose that the emotions of speakers vary with the truth of their speeches. They also propose that facial expressions are fundamental conduits for emotions. Accordingly, the more negative chairmen appear to feel during their roadshows, the more likely it may be that their prospectuses are misleading. If that is the case, corporate performance should decline after the IPO. We first test the correlation between the magnitudes of subjects' negative emotions (evaluated by face-reader software) and deceptive behaviors. We design a contrived situation in which subjects may lie without detection. The results show that the magnitude of subjects' negative emotions is significantly positively related to the possibility of lying. Consequently, we can use facial expressions to detect whether someone is lying. We introduce three measures: the total time during which a chairman displays negative emotions during a roadshow speech, the longest time length of negative emotion a chairman displays during a roadshow speech, and the minimum valence value of negative emotion a chairman displays during a roadshow speech. The results show a significantly positive relationship between the magnitude of negative emotion chairpersons show during IPO roadshow speeches and declines in post-IPO performance. Our study thus provides a new way to evaluate corporate value by focusing on chairmen's facial expressions during IPO roadshows. It also provides a new and easily accessible way for investors to protect themselves.