Disclosure and lawsuits ahead of IPOs
49 Pages Posted: 30 Mar 2020 Last revised: 1 Dec 2020
Date Written: March 4, 2020
IPO firms face strong concerns about proprietary disclosure, prompting regulators to allow submission of IPO registration statements confidentially under the JOBS Act. Prior research documents severe underpricing and other asymmetric information costs associated with obscuring information prior to an IPO. Nonetheless, the vast majority of eligible firms elect the confidential filing provision. In this study, we examine reducing non-shareholder litigation risk as a specific and quantifiable benefit that justify the use of this provision. We show that firms that publicly submit their registration with the SEC experience a 25% increase in non-shareholder lawsuits during the pre-IPO period. In contrast, a matched sample of firms that utilize the confidential filing provision do not experience such an increase. The difference between the two groups is concentrated among lawsuits in which the plaintiff is a business, rather than an individual, and among lawsuits that are more likely to be meritless. We find no disproportionate increase in non-shareholder lawsuits for the confidential filers following the IPO, which suggests that withholding information before the IPO period mitigates, rather than delays, opportunistic litigation.
Keywords: Non-shareholder lawsuits; corporate disclosure; initial public offerings; JOBS Act
JEL Classification: G10, G32, K20, K41, M41
Suggested Citation: Suggested Citation