The effects of IPO firms’ characteristics on SEC reviews of IPO registration statement

This study investigates how a host of IPO firm characteristics affect the extensiveness of SEC reviews of S-1 filings, as indicated by the duration of the IPO process, the number of comment letters issued by the SEC on each S-1 filing, the number of comments within comment letters and the number of themes commented upon the initial S-1 filings issued by the SEC. This study identifies that the SEC spend more time reviewing S-1 filings, issue more comment letters, more comments and wider range of themes for initial S-1 filings prepared by bigger IPO firms. Older IPO firms experience longer SEC review duration and receive more comment letters. Regarding the impact of IPO firms’ business complexity, the results reveal that SEC reviews are likely to be more extensive when reviewing IPO firms who have greater complexity in their business. In terms of financial health, IPO firms having a higher probability of bankruptcy are identified to have longer SEC reviews, receive more comment letters, more comments and more themes in the comment letters. More profitable IPO firms are also observed to experience longer SEC reviews. The results also reveal that shorter review times are experienced by IPO firms using more external financing. With regard to auditor quality, this study observes shorter reviewing time and fewer comments are experienced by IPO firms audited by Big4 auditors. Overall, the findings suggest that SEC reviews are likely to be more extensive when IPO firms display characteristics that indicate potential deficiencies in the informational quality of their IPO registration statements.In addition, the results suggest that IPO firms incur higher cost of remediation when receiving comments on core accounting issues, non-core accounting issues, business issues, and disclosure issues, as compared with other issues. Furthermore, comments on core accounting issues are observed to have the highest cost of remediation. The results also suggest that, during the period of the global financial crisis, SEC reviews became disproportionately more extensive for bigger IPO firms, IPO firms having higher external financing, and IPO firms with a higher probability of bankruptcy.