The Oversight Role of Regulators: Evidence from SEC Comment Letters in the IPO Process

Abstract

This study investigates how regulatory oversight affects the price formation process of initial public offerings (IPOs). We provide evidence on the oversight role of the US Securities and Exchange Commission (SEC) by examining the effects of comment letters (CLs) issued by the SEC in the process through which companies are initially listed. We find that IPO issuers revise their offer price downward if they receive CLs. The downward change in price from the IPO filing date to the final issue date is greater when the IPO firm has more CL correspondences with the SEC. The pricing impact of SEC CLs is more pronounced for IPO issuers with greater hyping incentives. Moreover, we find that IPO firms that receive more CLs have similar levels of underpricing and outperform over the long run after the issue date, compared with IPOs with fewer CLs.