hypothesis( Grinblatt and Hwang 1989, Welch 1989, Allen and Faulhaber 1989 and How and Low 1993) The phenomenon of underpricing has not received as much attention in an Australian setting by researchers when compared to the significant literature that has emerged in the US Lee, Taylor and Walter(1996a)find that Australian IPO underpricing varies in a manner consistent with the model of Rock(1986), and the extension of this by beatty and Ritter(1986) In contrast to Lee, Taylor and Walter(1996a), How(2000)documents that the degree of underpricing is not systematically related to long run returns for mining companies. The underpricing literature in Australia has also examined the robustness of the predictions generated by the signalling model of Datar, Feltham and Hughes(1991). To this end, Lee, Stokes, Taylor and Walter(1999)report a significant positive relation between ex ante proxies for an IPO candidate's firm-specific risk and the selection of a high quality auditor as an indication to the market of the underlying quality of the IPO candidate 2.2 Underpricing and stock Hype Lang and Lundholm(2000)suggest that increasing disclosure can be used to hype the stock and thereby reduce the firms' cost of equity. Lang and Lundholm(2000)examined the disclosure practices and associated stock market responses of 4 1 small companies in the US around the time of seasoned equity offerings The authors report significant results in support of their hypothesis that a higher level of disclosure during the period leading up to a stock-offering announcement is associated with higher stock returns. On announcement date, however, Lang and Lundholm found that the market penalises firms that achieved higher levels of disclosure by altering their previous disclosure patterns and they interpret this as evidence that firms hyped their stock However, the full penalty is not imposed on the announcement date for those firms that actively inflated their stock prices without an economic basis. The stock prices of these companies continue to decline for a period up to 390 days after the equity offering is announced5 hypothesis (Grinblatt and Hwang 1989, Welch 1989, Allen and Faulhaber 1989 and How and Low 1993). The phenomenon of underpricing has not received as much attention in an Australian setting by researchers when compared to the significant literature that has emerged in the US. Lee, Taylor and Walter (1996a) find that Australian IPO underpricing varies in a manner consistent with the model of Rock (1986), and the extension of this by Beatty and Ritter (1986). In contrast to Lee, Taylor and Walter (1996a), How (2000) documents that the degree of underpricing is not systematically related to long run returns for mining companies. The underpricing literature in Australia has also examined the robustness of the predictions generated by the signalling model of Datar, Feltham and Hughes (1991). To this end, Lee, Stokes, Taylor and Walter (1999) report a significant positive relation between ex ante proxies for an IPO candidate’s firm-specific risk and the selection of a high quality auditor as an indication to the market of the underlying quality of the IPO candidate. 2.2 Underpricing and Stock Hype Lang and Lundholm (2000) suggest that increasing disclosure can be used to ‘hype the stock’ and thereby reduce the firms’ cost of equity. Lang and Lundholm (2000) examined the disclosure practices and associated stock market responses of 41 small companies in the US around the time of seasoned equity offerings. The authors report significant results in support of their hypothesis that a higher level of disclosure during the period leading up to a stock-offering announcement is associated with higher stock returns. On announcement date, however, Lang and Lundholm found that the market penalises firms that achieved higher levels of disclosure by altering their previous disclosure patterns and they interpret this as evidence that firms ‘hyped’ their stock4 . 4 However, the full penalty is not imposed on the announcement date for those firms that actively inflated their stock prices without an economic basis. The stock prices of these companies continue to decline for a period up to 390 days after the equity offering is announced