Prof. Roni Michaely’s research paper “Information revelation through regulatory process: Interactions between the SEC and companies ahead of the IPO”, was accepted for publication at the Review of Financial Studies
We analyze communications between the SEC and firms prior to the IPO using LDA-analysis and KL divergence. SEC concerns map closely into the regulator’s stated mandate: companies increase prospectus disclosures within precise topics of SEC concern. Revenue recognition is the dominant topic of SEC concern, and it is not independently uncovered by investors. More SEC concerns about it are associated with greater secondary sales, lower post-IPO liquidity, lower post-IPO returns and higher probability of withdrawal. The role played by regulator during the capital raising process results in increased transparency, but at a cost of delays in the going public process.