Abstract
While the regulatory process improves informational efficiency, it is also costly to firms in terms of management time, revealing private information, and delays in raising capital. Hence, the extent of power given to financial regulators has been the subject of much debate and significant changes. We investigate the SEC’s role in the critical period of just before firms go public, focusing on both the motivations for and the outcomes associated with in-depth regulatory reviews. There exists considerable variation across companies in the length and complexity of review as well as the topics on which the SEC focuses. Moreover, the dynamics of the review process are related to initial returns, post-IPO volatility, and post-IPO returns. Using a new method to estimate the relation between topics in the SEC letters and in the initial prospectus, we find that SEC concerns that are more incremental to information disclosed in the initial prospectus represent negative signals regarding firm value.
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