Journal article
Information Revealed through the Regulatory Process: Interactions between the SEC and Companies ahead of Their IPO
Michelle Lowry, Roni Michaely, Ekaterina Volkova
The Review of Financial Studies | Oxford University Press (OUP) | Published : 2020
DOI: 10.1093/rfs/hhaa007
Abstract
We analyze communications between the SEC and firms prior to IPOs using LDA analysis and KL divergence. The SEC’s concerns closely map onto the regulator’s stated mandate: companies increase prospectus disclosures on precise topics of SEC concern. Revenue recognition is the dominant topic of SEC concern, and it is not independently discovered by investors. Increased SEC concern about it is associated with greater secondary sales, lower post-IPO liquidity, lower post-IPO returns, and a higher probability of withdrawal. The regulator’s role during the capital raising process results in increased transparency but contributes to delays in the going public process.
Grants
Funding Acknowledgements
We thank Yoav Artzi, Thomas Boulton, Casey Dougal, Gerry Hoberg, Laura Field, Ryan Israelsen, Lalitha Naveen, Mohammad Rahman, Fabio Trojani, and Andy Wu for valuable comments. We also thank participants at the SEC Fifth Annual Conference on Financial Market Regulation, the Eastern Finance Association meetings, and the Paris Financial Management Conference and seminar participants at UNSW, ANU, University of Melbourne, and the OCC for feedback. Michelle Lowry thanks the Raj and Kamla Gupta Governance Institute for financial support. Send correspondence to Ekaterina Volkova, University of Melbourne, Department of Finance, 198 Berkeley Street, Parkville, VIC, Australia; telephone: +61 3 9035 5110. E-mail: ekaterina.volkova@unimelb.edu.au.