Optimal Disclosure and Litigation Rules Around IPOs and SEOs

Abstract

We analyze the optimality of allowing disclosures of different types of information before equity offerings and of alternative rules for private securities litigation, where courts may penalize unduly optimistic disclosures ex post. In our model, firm insiders, with private information about variables affecting firm performance, may make claims (disclosures) about their future realization prior to new equity offerings. Equity offering prices are affected by firm disclosures; demand from institutional investors, with access to a costly disclosure verification technology; and demand from retail investors. We analyze self-regulation incentives and develop policy implications for disclosure regulation and for private securities litigation reform.

Keywords: Disclosure rules, initial public offerings (IPOs), seasoned equity offerings (SEOs), disclosure regulation, private securities litigation

JEL Classification: G24, G28, G32, G38