Do SEC reviews effectively address earnings quality? Evidence from IPO registration statements

Our paper examines the effectiveness of SEC reviews of IPO registration statements (i.e., S-1 filings) for firms going public in U.S. capital markets using a Naïve Bayesian machine learning algorithm.

About this event

Date: 03 November 2022
Location: LSBU Business School 3rd Floor Interact /Online MS Teams
Time: 12:00 - 14:00
Price: Free
Email: busresearch@lsbu.ac.uk
Organiser: London Centre of Business and Entrepreneurship (LCBER)

Research Today! Do SEC reviews effectively address earnings quality? Evidence from IPO registration statements

Dr Vy Ngoc Khanh Tran, Lecturer in Accounting, LSBU Business School

Chair Dr Yehia Nawar

Our paper examines the effectiveness of SEC reviews of IPO registration statements (i.e., S-1 filings) for firms going public in U.S. capital markets using a Naïve Bayesian machine learning algorithm. This investigation is important because market participants rely on the information conveyed by S-1 filings and SEC comment letters when making formative investment decisions. High information asymmetry around an IPO motivates a going-public firm to disclose misleading information opportunistically. Therefore, assessing the effectiveness of SEC reviews in monitoring the quality of IPO disclosures is of utmost importance. The findings show that IPO firms with greater accruals-based earnings management (AEM) are likely to experience more extensive SEC reviews, suggesting they are effective at addressing poor earnings quality. Weak evidence on the effectiveness of the SEC review in addressing discretionary-expense-based real earnings management (REM) is also identified. We also identify that IPO firms engage more in both AEM and REM after the JOBS Act enactment. The effectiveness of SEC reviews in uncovering the aforementioned forms of earnings management is more clearly evident under the JOBS Act. On the contrary, we find no evidence supporting that SEC reviewers are effective in detecting sales-based REM, either before or after the enactment of the JOBS Act, though this situation is somewhat improved under the Act.

Research Today! at LSBU Business School

'ResearchToday!' is a research seminar series that shows the breadth of research at LSBU Business School and is organised and hosted by the London Centre for Business and Entrepreneurship Research LCBER (pronounce: L-Cyber). It is a forum to foster collaboration and exchange among interested colleagues, visitors, collaborators and PhD students. We meet weekly during teaching term times (virtually on MS Teams during Covid19)

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