More Lemons, More Disclosure? The JOBS Act and Voluntary IPO Disclosure of Internal Controls

Abstract

I examine the change in voluntary IPO disclosure of internal controls after the JOBS Act. The JOBS Act postponed the compliance deadline of internal control audits after IPO. Simultaneously, it increased the number of small IPO firms with potential control weaknesses. I find that IPO firms are more likely to disclose internal controls after the JOBS Act. Further, post-JOBS IPO firms who are willing to disclose experience lower underpricing. This lower underpricing is not fully explained by the supplemental disclosure of remediation of control weaknesses. Finally, the increased disclosure of internal controls after the JOBS Act is not associated with worse accounting quality or more intensive SEC oversight on internal control issues. Collectively, these results are consistent with a dynamic view that as investors rationally update their beliefs of increasing “lemons” in the IPO population after the JOBS Act, IPO firms become more forthcoming with internal control disclosure.