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