Do SEC reviews address earnings quality at IPO?

We examine how effective are SEC reviews of S-1 filings (registration statements) by firms conducting IPOs in the US. This investigation is important as market participants rely heavily on this information to make formative investment decisions, while there are well-known incentives for opportunistic disclosure at IPO. Assessing the effectiveness of SEC reviews in monitoring the quality of IPO disclosures is therefore of utmost importance. Using a Naïve Bayesian machine learning algorithm, we show that IPO firms with greater accruals-based earnings management (AEM) tend to experience more extensive SEC reviews, suggesting they are effective in addressing poor accrual quality. Weak evidence on the effectiveness of the SEC review in addressing discretionary-expense-based real earnings management (REM) is also identified. These associations have strengthened under the JOBS Act. On the contrary, SEC reviewers do not appear to be effective in detecting sales-based REM, particularly under the JOBS Act. Overall, our study sheds new light on the sensitivity of SEC reviews to earnings management concerns, identifying some areas for further scrutiny.