IPO Firms and the SEC Comment Letter Process1

Yonca Ertimur Fuqua School of Business

Duke University 1 Towerview Drive Durham, NC 27708

Email: yertimur@duke.edu

Maria E. Nondorf Haas School of Business

University of California, Berkeley 545 Student Services Building #1900

Berkeley, CA 94720 Email: nondorf@haas.berkeley.edu

First Draft: July 12, 2006 This Draft: October 5, 2006

1 We thank Andrew McLelland at Auburn University and former Accounting Faculty Fellow at the SEC for valuable discussions about the comment letter process. We also thank Matthew Short for his excellent research assistance.

IPO Firms and the SEC Comment Letter Process

Abstract

We examine the comment letters issued by the Securities and Exchange Commission to public company filers for a sample of firms completing an initial public offering. First we describe the comment letter process for our sample firms, focusing on the duration of the process, the number of iterations the filing goes through, and the number and types of issues that are raised by the SEC. Next, we study the determinants of the comment letter process, with particular emphasis on managerial expertise and corporate governance, and its potential implications for the firms’ information environment. Our results show that higher managerial expertise is associated with fewer issues. We also find weak evidence that the attributes of the comment letter process are associated with the firm’s information environment. We contribute to the literature by providing insights to the SEC’s review process, firm’s disclosure systems, and the IPO process.

1

1. Introduction

In this paper we study the comment letters issued by the Securities and Exchange

Commission (“SEC” or the “Commission”) to public company filers (“filers” or

“registrants”) for a sample of firms completing an initial public offering.1 First, we

analyze various attributes of the comment letter process, including the content and the

frequency of the letters, and the duration of the process. Next, we examine the

determinants of these attributes, with particular emphasis on the role of managerial

expertise and corporate governance. Finally, we study the relation between the attributes

of the comment letter process and a firm’s information environment.

On an ongoing basis, the SEC’s Division of Corporation Finance reviews public

company filings for compliance with federal securities law and to enhance the quality of

disclosures.2 The result of this review process is a series of comment letters from the

SEC and replies from the firm indicating its response to the comments. While most

reviews are done on a selective basis, the SEC reviews all initial registration statements,

i.e., all S-1 and SB-2 filings.3 A registrant’s offering cannot become effective until the

SEC reviewer approves of the responses to its comments.

Prior to May 2005, the SEC required a written request to make these comment

letters available to anyone from the general public. As of May 2005, the SEC began

1 SEC staff and industry participants often use the term “comment letters” for two distinct purposes – to describe the letters that individuals and entities submit in response to requests for public comment on proposed rulemaking or other agency activity and to refer to the correspondence that issuers and SEC staff exchange concerning disclosure filings (see http://www.sec.gov/answers/commentletters.htm.) This paper concerns the letters issued under the latter description of comment letters. 2 In every comment letter, the SEC reviewer states that “…the purpose of our review process is to assist you in your compliance with the applicable disclosure requirements and to enhance the overall disclosure in your filing.” Thus, the SEC is explicitly commenting on both compliance and quality of disclosures. 3 An S-1 is the general registration statement for all companies offering securities to the public and an SB-2 is an optional form for the registration of securities to be sold to the public by small business issuers, defined as a U.S. issuer with revenues less than $25 million.

2

posting these comment letters and the filing firms’ responses publicly on its EDGAR

disclosure system.4 The SEC’s intent with the wider public release of these letters is to

expand the transparency of the comment letter process and to make the information

available to a broader audience.

The comment letter process is one channel through which the SEC attempts to

enhance the overall disclosure quality in the US securities markets. Our analysis of the

comment letter process is motivated by the desire to better understand the impact of

regulatory oversight on compliance and disclosure quality. The increased access to

comment letter data allows us to obtain insights into the SEC’s review process and to

systematically assess how the regulator defines compliance and disclosure quality. Our

analysis of the role of managerial expertise and corporate governance characteristics in

determining the attributes of the comment process and of the potential consequences of

this process on firm’s information environment is motivated by the empirical disclosure

literature that focuses on the determinants and economic consequences of corporate

disclosure (see Healy and Palepu (2001) for a review).

We choose to study the comment letters for IPO firms for a number of reasons.

First, the SEC reviews all S-1 and S2-B filings. Thus, there are no issues with

interpreting the SEC’s selection of firms to review. Second, by focusing on IPO firms,

we potentially capture firms’ first formal attempt to disclose information publicly and

their first opportunity to impress investors and the SEC with their compliance and

disclosure quality. In essence, every IPO firm is starting with a “clean slate” in terms of

4 EDGAR is also called the Commission’s Public Dissemination Service and is the electronic datasource for SEC filings, including, now, the comment letters. See www.sec.gov for access to EDGAR. The comment letters and firm responses that the SEC makes available on EDGAR are for new filings made on or after August 1, 2004.

3

formal public disclosure. Third, the SEC likely plays a greater role in shaping disclosure

quality for these firms (by reviewing every IPO firm’s filings), as there is likely more

uncertainty surrounding an IPO firm’s information environment. Further, IPO firms are

more likely to be in a similar stage of their life cycles than the general population of

firms.

Our sample is comprised of 130 IPO firms for which the SEC has posted

comment letters on S-1 and SB-2 filings on EDGAR. Our sample firms took a mean

(median) of 118 (104) days to complete their offering from the date that they filed their

initial S-1/SB-2 registration statement until the date the IPO went effective. Including the

initial S-1/SB-2, firms filed a mean (median) of 5.9 (6) versions of their S-1/SB-2 (i.e.,

the original S-1/SB-2, plus amendments). The mean (median) firm received 3.4 (3)

rounds of comment letters from the SEC.5 For 95 of these firms, we read through these

comment letters and coded the contents based on a self-constructed coding scheme which

we discuss in detail in Section 3.2. This scheme results in 6 categories of 103 different

“issues” raised in the comment letters. The first round comment letter for sample firms

included a mean (median) of 41.6 (44) issues (out of a possible 103 identified issues).

The time from the initial S-1/SB-2 to the effective date of the IPO, the number of S-1/SB-

2 drafts, the number of rounds, the number of comments, and the number of issues are the

IPO and comment letter process attributes that we focus on in our subsequent analysis of

the determinants and consequences of the comment letter process.

We next study the determinants of the comment letter process, in particular

managerial expertise and corporate governance characteristics. We hypothesize that the

5 The mean and median number of amendments is lower than the mean and median number of comment letter rounds because firms may file an amended S-1/SB-2 for reasons other than replying to comment letters (e.g., including additional information regarding the offering price and other terms of the offering.)

4

more financial reporting experience that a firm’s management has, the higher the firm’s

initial level of compliance and disclosure quality and the more “smooth” the

offering/comment letter process will be. We define a “smooth” process in terms of fewer

rounds of comment letters, lower numbers of comments per letter, and quicker time from

filing the initial registration statement until the IPO becomes effective. Our analysis of

the effects of managerial expertise is similar in spirit to research that explores how

managerial style affects corporate behavior and performance (e.g., Bertrand and Schoar

(2003) and Malmendier and Tate (2005)). Similarly, we hypothesize that firms with

better corporate governance mechanisms will have a higher initial level of compliance

and disclosure quality which will translate into a smoother comment letter process.

With respect to the role of managerial expertise, we find that, IPO firms that have

CFOs with prior experience working for a publicly-traded company, receive, on average,

fewer SEC comments that address fewer issues, and a (marginally) lower number of

amendments to the initial registration statement. These results suggest that an

experienced CFO may better understand the SEC’s criteria for compliance and disclosure

quality and may be able to anticipate reviewers’ comments. In contrast, measures for

CEO expertise are not associated with the attributes of the comment letter process. Our

findings on the role of corporate governance are overall not consistent with our

predictions and do not produce clear patterns with respect to the effects of corporate

governance on the comment letter process.

Our final analysis examines the relation between the comment letter process and

firms’ information environment. We focus on two aspects of the information

environment: ex-ante uncertainty that investors face with respect to the value of the IPO

5

firm at the time of offering and information asymmetry among investors in the post-IPO

period. As noted above, while investors do not directly observe the contents of the

comment letters in the period leading up to the IPO, they do observe the effect of the

comment letters on the firms’ disclosures in the amendments to the initial S-1/SB-2

filings. We posit a negative association between the level of compliance/disclosure and

the levels of ex-ante uncertainty and information asymmetry.

One strand of prior IPO literature attributes IPO underpricing to ex-ante

uncertainty (Rock (1986)). Therefore, in our empirical analysis we use first-day

underpricing as a measure of ex-ante uncertainty and study its association with our

IPO/comment letter process variables. To examine the effect of IPO/comment letter

process on the post-IPO information asymmetry among investors, we use the bid-ask

spread and depth as proxies. Our results provide weak evidence of an association

between the IPO/comment letter process and the information environment. Specifically,

consistent with our predictions, we find that there is a negative association between the

number of comments/issues and depth. However, we find no evidence of an association

between depth and the other IPO/comment letter process variables. Similarly, first day

underpricing and the bid-ask spreads are not associated with the attributes of the

IPO/comment letter process.

There are alternative interpretations for the information environment results. The

cross-sectional variation in the level of compliance/disclosure quality at the time of the

initial filing may be reduced to an empirically non-detectable level as a result of the

comment letter process. In other words, initial compliance/disclosure quality level may

6

not be indicative of future compliance/disclosure quality issues. Alternatively, the

measures may be too noisy to capture the level of compliance/disclosure quality.

Our information environment analysis is closely related to Schrand and

Verrecchia (2006) that studies the association between voluntary disclosure by IPO firms

and (i) underpricing and (ii) liquidity. However, the results in Schrand and Verrecchia

(2005) are different from our results. Specifically, Schrand and Verrecchia (2005) find

that greater disclosure frequency, measured as the number of press releases in the pre-

IPO period, is associated with lower underpricing for non-internet firms. They also find

that disclosure frequency is associated with greater market liquidity, measured as bid-ask

spreads and market depth, in the post-IPO period. These differences in the results may be

attributable to the disclosure quality measures or to the fact that Schrand and Verrecchia

(2005) focus their analysis on IPO firms with the most extreme first-day underpricing.

We believe that our analysis provides insights into the SEC’s review process that

has not, except for extreme misreporting (e.g., Dechow, Sloan, and Sweeney (1996) and

Erickson, Hanlon, and Maydew (2004)), been studied academically. These insights can

help both financial statement users and preparers appreciate the regulator’s assessment of

compliance and quality. Our study also provides an indirect glimpse inside firms’

disclosure and communications systems. While these systems are complex and generally

unknowable to those outside of a firm, the measures that we use to capture the comment

letter process shed light on the quality of such systems. Finally, we examine the

comment letter process in a setting where all registrants are subject to review, all firms

are entering a dramatically new financial reporting regime (i.e., from private to public),

and where uncertainty regarding a firm’s information environment is extraordinarily

7

high. Thus, we contribute to the understanding of the initial offering process, particularly

in terms of financial reporting and disclosure.

Our paper proceeds as follows: Section 2 describes the background information

on the SEC’s comment letter process and describes the development of the hypotheses

we test; our data collection and variable definitions are laid out in section 3; section 4

presents the results of our empirical tests and section 5 concludes and offers our roadmap

for future work.

2. Background Information and Hypotheses

2.1 The SEC’s Comment Letter Issuance Process

In this paper we use the term “comment letter” to refer to the correspondence

between SEC staff and registrants in the review of required filings. The Division of

Corporation Finance of the SEC provides filers with comments on filings where they

believe that the filing could be improved or enhanced.6 The comment letter process can

consist of several iterations of comment letters from the SEC and responses from filers

and the process is complete upon the resolution of all issues relating to a filing review.

While comment letters are not designed to provide a comprehensive review of the filing,

and successful completion of the review process does not imply an explicit “blessing” or

“approval” by the SEC, it is reasonable to expect a marked improvement in compliance

and disclosure quality as a result of these reviews.

The SEC issues comment letters for virtually every type of filing under both the

Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC sets forth a

6 From www.sec.gov/divisions/corpfin.shtml, “The Division of Corporation Finance’s mission is to see that investors are provided with material information in order to make informed decisions – both when a company initially offers its stock to the public and on a regular basis as it continues to give information to the marketplace. The Division also provides guidance to companies on SEC rules and forms and proposes new and revised rules to the Commission.”

8

priority order for the filings that they will review. All initial registration statements are

reviewed, as are filings for all tender offers, going-private transactions, and proxy

contests. Other classes of filings, such as Forms 10-K/KSB are reviewed on a selective

basis, but at least once every three years under Section 408 of the Sarbanes-Oxley Act.

The reviews are conducted by a team of individuals at the SEC with the appropriate

industry, financial and legal expertise.

The SEC has recently adopted a new disclosure policy regarding these comment

letters. Under the old disclosure regime, SEC comment letters are available to the public

under the Freedom of Information Act (“FOIA”). However, access to these letters

requires a specific written request to the SEC. In recent years, the SEC saw a marked

increase in the number of comment letters and responses being released through the

FOIA process, mainly to large data collection companies that were extracting the letters

and selling them to data users for a price. This trend was of concern to the SEC because

it provided uneven access to the letters.

The Commission announced on June 24, 2004 that it would be releasing the

comment letters and corresponding registrants’ response letters for filings made after

August 1, 2004 through their EDGAR filing system to make this information available to

a broader audience, free of charge. The SEC began the process of releasing the letters on

May 12, 2005 for all filings initiated after August 1, 2004. Under the new system, all

comment letters and registrant response letters for a particular filing are released on

EDGAR in one batch no less than 45 days after the SEC staff has completed its review of

the filing. This is done so that any interim correspondence is not misconstrued because

the filer has not had an opportunity to respond.

9

Our focus on this paper is on comment letters for IPO firms (i.e., firms filing an

S-1 or SB-2 registration statement for an initial offering of comment stock). Appendix A

provides a general timeline of the IPO filing process and shows how the comment letter

process fits into the overall filing process. For initial registration statements, the SEC’s

goal is to comment within 30 days after the statements are initially filed. For fiscal year

2005, the actual mean number of days to issue the first comment letter was 26.1 days.7

Additional rounds of comment letters serve to extend the filing process and require

additional management attention and cost to resolve.8 The last comment letter prior to

the effective date generally gets down to the “brass tacks” as far as making sure all legal

matters and underwriting issues are cleared up. There are rarely significant financial

reporting issues remaining in the final comment letter before the IPO goes effective. The

registration statement becomes effective only after the filing company has addressed all

of the comments from the SEC to the reviewer’s satisfaction. This also means that the

release of the letters to EDGAR takes place at least a month after the effective date of the

IPO as the IPO usually becomes effective within several days after the last comment

letter from the SEC.

We believe that the availability of comment letters and responses will provide

insights into the communication mechanisms between the SEC and the registrants. This

form of disclosure is certainly less formal than the forms that registrants are required to

file. Yet, it sheds light on a firm’s overall communication and disclosure systems and

provides access to the questions that the SEC, as the regulator, is asking of its filers.

7 See the 2005 Securities and Exchange Commission Annual Report, Exhibit 2.10, “Average Time to Issue Initial Comments on Securities Act Filings.” . 8 The costs to a firm of an additional round of comment letters is likely non-trivial, considering the time of executives and their battery of advisors (audit partners, underwriters, attorneys) who are all heavily involved in addressing these comment letters.

10

Investors typically are able to indirectly see the firm’s response to the SEC’s comments

through comparison of the initial filing of the S-1 or SB-2 to various rounds of

amendments to the S-1 or SB-2 that are publicly available before the IPO becomes

effective. With the comment letters being widely available, users can now “hear the

other side of the telephone conversation” by having improved access to the SEC’s side of

the discussion.

Various attributes of the comment letter process can potentially serve as proxies

for the improvement in a firm’s disclosure and compliance quality from the time the firm

files its initial S-1/SB-2 registration statement to the time the IPO goes effective. We

assume that each IPO firm has an “initial level” of compliance and disclosure quality at

the time it files its initial registration statement. We expect that, for various reasons, this

“initial level” will vary among firms in the cross-section. The comment letter process

then takes place and the registrant amends their S-1/SB-2 in response to the comments

and in order to provide missing information. Ultimately, the SEC staff must conclude

that all the issues related to the review of S-1/SB-2 have been resolved to their

satisfaction in order for the firm’s IPO to go effective and the firm’s stock to start trading.

At this time the quality of disclosure has presumably improved to an “issuance level” of

compliance and disclosure that meets some threshold level. In constructing the our

measures of the comment letter process (described in detail in Section 3.2), our intention

is to capture the “initial level” of a firm’s disclosures as well as the change in disclosure

quality from the “initial level” to the “issuance level”.

There are several other ways that investors as well as other companies that are

publicly traded or thinking about becoming publicly traded can use these letters. For

11

example, users of these letters can analyze them to gain insight into the issues that the

SEC is focusing on in order to establish best practices for their own disclosure systems.

Our analysis sheds some light on these issues, but whether and how investors or other

firms are putting these letters to use is left for future research.

2.2 Managerial Expertise and Corporate Governance Oversight Hypotheses

Our first set of hypotheses relates to an evaluation of the determinants of the

contents of the SEC comment letters (and the overall IPO process in general).

A manager’s decision-making style has the ability to shape the operating,

investing, and financing activities of a firm, as well as the success or failure of these

activities. For example, Bertrand and Schoar (2003) show that a manager’s age (above

and below the median age for their sample) and education (MBA or not) is associated

with the degree of conservatism/aggressiveness in his firms’ strategies. In a similar vein,

Malmendier and Tate (2005) provide evidence that managerial overconfidence can

account for corporate investment distortions. We extend the line of thinking in Bertrand

and Schoar (2003) to consider the role of managers’ context-specific expertise.

Specifically, we reason that prior managerial expertise in the going public process and

with the public company financial reporting process will have a positive effect on the

outcomes of the oversight and review process (i.e., the firm will be able to address the

comment letter process in a more efficient and less costly manner). Managerial expertise

in this context can lead to better anticipation of the comments the SEC may make, as well

as improved ability to negotiate with the SEC on its comments. Our first hypothesis,

stated in alternate form, is as follows:

H1 : , Firms with managers who hold higher levels of financial reporting expertise will have a higher “initial level” of compliance/disclosure

12

quality at the time of filing their initial S-1/SB-2 registration statement, ceteris paribus. Next we consider the impact that the corporate governance mechanisms at a firm

undergoing an IPO have on initial compliance and disclosure quality. Much recent

academic research has examined the effect of corporate governance structures on the

decisions and outcomes of the firms. Dechow, Sloan and Hutton (1996) examine

corporate governance mechanisms for another set of firms under the oversight of the

SEC, i.e., firms that have received accounting enforcement actions for violations of

GAAP reporting. They find that firms with weaker corporate governance structures are

more likely to manipulate earnings. We use a similar approach and we expect that a

stronger corporate governance environment will enhance the going-public process and

that enhancement will be reflected in improved levels of compliance and disclosure at the

time the initial S-1 or SB-2 is filed for SEC review. This leads us to our second

hypothesis, as follows:

H2 : , Firms with stronger corporate governance mechanisms will have a higher “initial level” of compliance and disclosure quality at the time of filing their initial S-1/SB-2 registration statement, ceteris paribus.

It could be the case that our tests of managerial expertise and corporate

governance mechanisms will simply indicate which firms are better at understanding the

“game” of getting through the comment letter process without providing any measurably

improved quality of information. That is, having the expertise and mechanisms in place

to facilitate the interaction with the SEC may simply mean that a firm’s managers are

simply more skilled at negotiating with the SEC staff to appease them in order to more

efficiently resolve comment letter issues. This ability to strategically negotiate with the

13

SEC may improve the efficiency of the comment letter process, but it may or may not

improve the quality of disclosures.

2.3 Information Environment Hypotheses

Our next hypotheses relate to the effects of the comment letter process on the

information environment of IPO firms. The intent is to assess whether regulatory

intervention and oversight, through the SEC comment letter process affects a firm’s

information environment.

Investors’ uncertainty about the IPO firms is likely to be high. First, these firms

are likely to have a relatively short operating history and be in the growth stage more so

than the cross-section of existing public firms. Second, private firms are not subject to

the same disclosure requirements as public companies. Thus, even for IPO firms with a

long operating history, investors do not have access to a rich history of financial and non-

financial information that will help them value the company.

Assuming that the SEC has a threshold “issuance level” of disclosure and

compliance, and after the comment letter review process, every firm meets this threshold

level, there will likely still exist variation in disclosure quality (above the SEC’s

threshold level) because of firm-specific variation in the costs of disclosure (e.g.,

proprietary costs (Verrecchia (1983)) and agency costs (Healy and Palepu (2001)). This

remaining variation in disclosure quality will mean that there will be cross-sectional

differences in uncertainty and information asymmetry.

As noted previously, the SEC’s intent is not to provide a comprehensive review or

approval of the disclosures in the filing, but its intent is to comment on the ways that a

registrant can improve or enhance the disclosures. Thus, there is likely improvement in

14

the quality of disclosures as a result of the review, but there will remain uncertainty about

the underlying value of the firm. Alternatively, the variation in the “initial level” of

quality may be perceived by the market as reflecting more inherent uncertainty regardless

of the progress achieved through the comment letter process.

Following Rock’s (1986) model of the underpricing of IPOs and allowing for

outcomes of the comment letter process to represent the quality of compliance and

disclosure, we expect that this quality will be associated with levels of uncertainty as

measured by the degree of first day underpricing. Leone, Rock, and Willenborg (2003)

document that the level of disclosure as measured by the specificity of information

regarding the intended use of IPO proceeds is associated with lower underpricing. They

link this reduction in underpricing to asymmetric information explanations.

Complimentarily, Schrand and Verrecchia (2005) find that greater disclosure frequency,

as defined by the number of pre-IPO voluntary press releases is associated with lower

underpricing. Similarly, we hypothesize the following:

H3 : Firms with a lower “initial level” of compliance and disclosure quality at the time of filing their initial S-1/SB-2 registration statement will have greater (unexpected) initial day underpricing, ceteris paribus.

This hypothesis is akin to Proposition 1 in Beatty and Ritter (1986) and provides

for underpricing to capture variation in the ex ante uncertainty surrounding an initial

offering.

Relatedly, the existence of informed traders who possess private information

gives rise to information asymmetry among investors.9 A firm’s choice of

compliance/disclosure quality potentially influences the level of information asymmetry

9 Information asymmetry can also arise from superior ability to process public information.

15

among investors. This is because higher quality (e.g., an increase in the precision of

public information about firm value) degrades the private benefits of information

gathering and hence, reduces the incentives to acquire private information (see, e.g.,

Verrecchia (1982), Diamond (1985), Diamond and Verrecchia (1991), Baiman and

Verrecchia (1996), and Verrecchia (2001)). There are numerous studies that provide

empirical support for the negative association between disclosure quality and information

asymmetry (e.g., Welker (1995), Healy, Hutton, and Palepu (1999), and Leuz and

Verrecchia (2000)). Alternatively, disclosure quality may increase a firm’s visibility or

reduce the costs of processing public information, including more trading by uninformed

investors, resulting in lower information asymmetry (see, e.g., Merton (1987) and

Fishman and Hagerty (1989)).

As in Schrand and Verrecchia (2005) who find that their disclosure frequency

measure is associated with greater liquidity in the post-IPO period, we propose the

examination of the association between compliance and disclosure quality (as measured

by the comment letter process) and variation in information asymmetry (as by post-IPO

trading-based measures of information asymmetry). Our hypothesis for this proposal is

as follows:

H4 : Firms with a lower “initial level” of compliance and disclosure quality at the time of filing their initial S-1/SB-2 registration statement will have greater levels of post-IPO information asymmetry, ceteris paribus.

The next section describes how we operationalize these hypotheses.

16

3. Data Collection and Variable Definitions

3.1 Sample Selection

The SEC began releasing comment letters and firm response letters on May 12,

2005. We have collected all comment letters and firm response letters for S-1 and SB-2

registration filings posted to EDGAR from the initial May 12, 2005 date through

September 30, 2006. For our specific sample, these letters relate to IPOs going effective

from October 28, 2004 through December 21, 2005. Thus, all letters in our sample relate

to the same time period and reporting regime.10

Table 1, provides a description of sample selection. We started with IPOs from

SDC’s offering database with initial S-1/SB-2 filing dates from August 1, 2004 (the date

from which the SEC said it would post letters to EDGAR) through December 31, 2005.

This resulted in an initial sample of 196 IPO firms. We removed 15 international filers

and 6 non-IPO observations from the sample. Through September 30, 2006, 45 of the

IPO firms did not have comment letters posted to EDGAR.11 This resulted in a final

sample of 130 firms that underwent initial public offerings and had at least one comment

letter from the SEC related to their filing.

As a comparison, Ritter (2006) reports 179 and 162 IPOs for 2004 and 2005,

respectively. Our sample includes banks and S&Ls, while the sample in Ritter (2006)

does not. The number of IPOs in Ritter (2006) is higher, because our time period only

covers IPOs initiated from August 1, 2004 through December 31, 2005, and we are 10 William H. Donaldson was the Chairman of the SEC from February 18, 2003 through June 30, 2005. Christopher Cox succeeded him on August 3, 2005, so there was a leadership change at the regulator during our sample period. However, Donald Nicolaisen served as the Chief Accountant at the SEC, which is arguably the leading position in the SEC’s Division of Corporation Finance, from 2003 through October 2005, covering most of our sample period. 11 Publicly available SEC guidance indicates that all initial registration statements are reviewed. Therefore, it appears that for these 45 firms, the comment letters have not been published yet. We will expand our sample to include these firms as their comment letters become available.

17

constrained to including firms that have comment letters and firm response letters filed

on EDGAR.

Panel A of Table 2 presents a breakdown of the sample by industry. Banks

(depository institutions, credit institutions, and security brokers) (13.8%) and computer

equipment/electronics/instrument manufacturing (16.2%) are the most significant

industry groups represented in our sample. We designate electric/gas/sanitary services,

banks, insurance carriers, real estate, holding and other investment offices as regulated

industries because we expect that firms that operate in regulated industries are more

experienced in preparing and disclosing financial statements and related information to

regulatory bodies. Of our sample of 130 IPO firms, 37 of these are in regulated

industries.

Panel B of Table 2 reports that 67.7% of sample firms (or 88 firms) are traded on

NASDAQ, while 26.2% and 6.2% (34 and 8 firms) of sample firms are traded on the

NYSE or AMEX, respectively.

3.2 The Comment Letter Coding Process

This section describes how we distilled the information contained in the comment

letters. Each comment letter from the SEC to the filing company’s management was

coded by hand to classify each specific comment into one of 103 coded issues.12 See

Appendix B for a listing and the definitions of the 103 coded issues. A firm scored a “1”

for a particular coded issue if the issue was mentioned in a comment letter for the firm,

and a “0” if there was no mention of the issue in the comment letter. Thus, a firm could

12 Because of the highly subjective nature of the coding process and the advanced technical accounting nature of the comments, all coding was performed by the co-authors of this paper.

18

receive a maximum score of 103 if every single issue was mentioned in the comment

letter.

From Appendix B, we can see that the most frequent comments were regarding

the clarification of accounting policies, claims, commitments and contingencies, related

party transactions, the firm’s competitive environment, enhancement of the management

discussion and analysis section, discussion of the proceeds from the offering, overall risk

factors, underwriting matters, and general formatting issues. Overall, the SEC’s

comment letters appear to be consistent with their public plea for improved disclosure

(see, for example, “Current Accounting and Disclosure Issues in the Division of

Corporation Finance,” dated December 1, 2005).13

These 103 coded issues, in turn, were assigned, on an ad hoc basis, into six

categories, based on the nature of the coded issues.14 The six categories are as follows:

I. Auditing and Reporting Issues (Maximum Firm Score = 15 Coded Issues) These items represent issues or questions that the SEC posed relating to how specific auditing and reporting items were represented in the financial statements and disclosures. II. Accounting/Financial Reporting/Disclosure Topics (Maximum Firm Score = 30 Coded Issues) These items represent questions or issues posed by the SEC related to the accounting, financial reporting, or disclosure of specific transactions or classes of transactions. III. Business Issues (Maximum Firm Score = 18 Coded Issues) These items represent questions or comments about the firm’s operating, financing, or investing matters disclosed in the offering document. IV. Tone and Level of Disclosure Issues (Maximum Firm Score = 19 Coded Issues) These items represent requests for additional information or questions about the manner in which the firm presented its disclosures and the level of disclosure that the firm presented in its initial S-1 or SB-2 filing.

13 This document can be found at http://www.sec.gov/divisions/corpfin/acctdis120105.pdf. 14 We also attempted to use a statistical approach to group the coded issues. Principal component analysis yielded 31 groupings, which is too unwieldy for inclusion in our regression analyses. Additionally, our sample size is too small and the number of issues too large to render factor analysis a useful tool for reducing our data.

19

V. Corporate Governance Matters (Maximum Firm Score = 10 Coded Issues) These items summarize questions or comments about the firm’s corporate governance mechanisms as disclosed in the offering document. VI. Offering-related Issues (Maximum Firm Score = 11 Coded Issues) These items represent questions or issues raised by the SEC regarding matters associated with the initial public offering per se. These items relate to procedural issues or regulatory compliance issues.

Thus, the comments were classified into 103 coded issues, and the coded issues

were grouped into 6 categories. Although our grouping methodology is subjective and

our “one-coded-issue-equals-one-point” weighting scheme is likely not representative of

the relative importance of various comments, we feel that our groupings accurately and

thoroughly capture the information content of the comment letters. We do realize that

several of the coded issues could apply to multiple categories. We selected the category

that the coded issue most closely fit into.

3.3 IPO Process and Coding Letter Variables

Panel A of Table 3 provides descriptive statistics related to contents of the

comment letters for our sample firms. As a measure of the overall efficiency of the IPO

filing process, we report the number of days from initial filing of an S-1/SB-2 through the

IPO effective date (“TIME_TO_IPO”) as a mean (median) of 118.4 days (104 days).

We counted the number of S-1/SB-2 registration statements and amendments filed

by each firm. The mean (median) number of S-1/SB-2s and amendments filed per

sample firm was 5.9 (6.0.) We call this measure “DRAFTS.” This measure is readily

available to investors throughout the registration process and at the time of the IPO, as

investors have access to the filings and amendments from EDGAR as soon as the firm

files them. We could consider the number of drafts to be the firm’s response to the

20

comment letter process. However, there are usually more amendments than there are

comment letters, so an amendment need not be a revision to the S-1/SB-2 in response to a

comment letter.

Panel A reports that, in fact, the mean (median) firm received 3.4 (3.0) rounds of

comment letters from the SEC. The minimum number of rounds (letters) was 1 and the

maximum was 9. We designate this measure of the number of comment letters received

by a firm as “ROUNDS.” We expect that more rounds (letters) create more cost and

effort on the part of the firm and it reflects a poorer “initial level” of the firm’s

compliance and disclosure quality.

Panel A also reports the number of comments in the first round letter. We argue

that this first round of letters is the most important in terms of establishing the “initial

level” of an IPO firm’s compliance/disclosure quality. The mean (median) IPO firm

received 60.8 (59) comments in the initial letter.

For 95 of our 130 sample firms, we coded the comment letters, as described in

Section 3.2. As shown in Table 3, Panel A, for this sub-sample of firms, there were a

mean (median) of 41.6 (44) issues identified. Distributions for the six categories of

coded issues in the first round are also presented. Accounting/Financial

Reporting/Disclosure Topics are (by construction) the most prevalent.

We also define a variable called “TURNAROUND,” which represents the number

of days it takes the SEC to respond to the IPO firm’s initial S-1/SB-2 filing with its first

comment letter. The mean (median) number of days is 28.5 (28).

Finally, Panel B of Table 3 provides a breakdown of the comment letters by

reviewer. In order to maintain the anonymity of the reviewers, we have neither identified

21

their names or their industry specialties. Reviewers are generally assigned to a particular

filing based on industry expertise. We understand that the reviewers have significant

latitude in how they construct their comment letters. Thus, although the sample per

reviewer is generally small, there do appear to be patterns of variation based on who is

reviewing the documents. Unfortunately, because of our small sample size, we have not

yet exploited this information in our further tests to control for the idiosyncrasies of the

reviewers and their industry specialties.

To summarize, we will be using the following comment letter measures to capture

the “initial level” of quality (and complementarily, the change in quality) of IPO firm

compliance and disclosures:

• TIME-TO_IPO: This measure represents the number of days from the date that the

firm initially filed its S-1/SB-2 with the SEC to the date that the IPO becomes

effective. Even though this period encompasses more than just the comment letter

period, it is indicative of management’s ability to push through the filing process.

• DRAFTS: This measure is a count equal to the original S-1/SB-2 filing document,

plus any amendments to the S-1/SB-2.

• ROUNDS: This measure is equal to the number of comment letters that each firm

received as part of the filing process.

• COMMENTS: This measure is the number of comments contained in the first round

comment letter.

• ISSUES: This measure represents the total number of coded issues (out of a possible

103) that the firm received through the coding of the first round comment letter.

22

For each of these measures, we expect that higher numbers mean more cost and

effort (to both the filing firm and potential investors) and greater change in the quality of

compliance/disclosure from the firm’s “initial level” of disclosure.

3.4 Managerial Expertise Variables

In examining managerial expertise related to the filing process, we focus on the CEO and

CFO. These are the individuals (along with their third-party advisors) who are most

likely to influence the financial reporting and disclosure decisions that are part of

becoming a public company. We obtain the data for these measures from the firm’s final

prospectus that is filed after the effective date of the IPO and that relates to the period up

to the IPO. Table 4 presents descriptive statistics for our managerial expertise variables

(“CEO_EXPER” and (“CFO_EXPER”) . We expect that previous work experience in a

managerial-level position for another public company will affect the comment letter

process. Of our 130 sample firms, 39% of CEOs and 47% of CFOs have such

experience. We argue that this particular knowledge capital can be easily and efficiently

transferred to the management of the firm’s IPO process.

We also include measures for whether the CEO has an MBA degree

(“CEO_MBA”) and/or whether the CFO is a CPA (“CFO_CPA”). Of CEOs in our

sample, 23% have MBAs and 44% of CFOs are CPAs. We expect that having an MBA

and a CPA designation with make the IPO process smoother.

3.5 Corporate Governance-related Variables

We define a firm’s corporate governance mechanisms as those structures that are

set in place, perhaps in contemplation of the IPO, that serve to align the interests of

managers and the board of directors with the firm’s investors. Using the prospectus filed

23

at the closing of the IPO, we construct several corporate governance variables. Table 4

provides descriptive statistics for the corporate governance-related variables we use in

our analysis. First, the percentage of the board of directors comprised of managers

(“MAN_BOARD”), with a mean (median) of 24% (17%)) for our sample, measures the

ability of management to affect the decisions of the board, thus impeding independence

of the board. A higher value represents poorer governance. We also include a dummy

variable for whether the CEO is chairman of the board (44% of sample firms), with a 1

indicating that as the board is led by a member of management, the board’s ability to

monitor may be weaker..

We have a dummy variable that is equal to 1 in the presence of a major

independent blockholder, i.e., a greater than 5% shareholder that is non-management and

not an affiliated company (“BLOCK”.) The presence of the blockholder should help

align management’s interests with those of the potential new investors. 59% of our

sample firms have a blockholder at the time of IPO.

We also include levels of CEO beneficial ownership (and the square of

ownership, reflecting the non-linear relation between ownership and benefits to a firm).

The corporate governance effects from the levels of CEO beneficial ownership of the

firm’s common stock are ambiguous. Owning stock in the IPO firm helps to align

management’s interests with other investors, but having too much stock could confer

private benefits of control to management. For example, Malmendier and Tate (2004)

classify managers as overconfident in their beliefs about the value of the firm when they

have high personal exposure to company-specific risk. Thus, if executives hold

substantial portions of their firm’s stock at the time of the IPO, they may be

24

overconfident about their firm’s ability to succeed in the IPO market. For our sample, the

mean (median) ownership for the CEOs not taking into effect the IPO. (“CEO_OWN”),is

12% (3%).

Additionally, we include other sources of attributes that could affect the comment

letter process. These measures include the firm’s 2004 Carter-Manaster underwriter

ranking (Ritter (2006)) and a dummy variable for firms with audits conducted by a Big 4

firm. To some extent, these other sources are correlated with our managerial-level

expertise measures as these other sources are likely endogenously determined. Future

versions of this paper will test this notion.

Our model of the determinants of the comment letter process is described as

follows:

Comment letter process measure = f(Managerial expertise measures, Corporate governance measures, Big 4 auditor dummy, Carter-Manaster underwriter score, Regulated industry dummy, Size)

3.6 Information Environment Measures

We hand collected IPO firm offering data from Hoover’s and the final offering

prospectus. Table 4 presents descriptive statistics for the offering-related variables for

our sample firms. We define underpricing (or “RUNUP”) as the change in stock price

from the initial offering price to the closing bid price at the end of the first day of trading,

divided by the initial offering price. Our underpricing percentages, at least at the mean of

10.1%, are in line with the 12.1% and 10.0% mean first-day returns reported by Ritter

(2006) for firms undergoing IPOs in 2004 and 2005, respectively. Our median

underpricing percentage is 6%. Further, the mean (median) dollar proceeds from the

offering ($165.7 million ($83.0 million)) exceeds Ritter’s (2006) averages for 2004 and

25

2005 of $32.38 million and $28.677 million, respectively. Again, Ritter (2006) excludes

banks and S&Ls from his analysis.

We use the following model to test the hypothesis that compliance and disclosure

quality as captured by our comment letter measures affects the ex ante uncertainty related

to the value of an offering as captured by the degree of first-day underpricing:

Percentage underpriced (RUNUP) = f(Comment letter measures, Offering control measures)

We include the same set of control variables as Schrand and Verrecchia (2005) in

our empirical specification. Specifically, we control for the percent of stock retained by

the firm after the IPO. A larger percentage implies more private information on the part

of the sellers. We also include the log of the age of the firm and the log of the offering

amount, to control for the information potential of the firm and the information effects of

the size of the offering. Finally, consistent with previous research, we include a Big 4

audit firm dummy variable and the 2004 Carter-Manaster underwriter rank (see Ritter

(2006)).

If underpricing captures the price of uncertainty for investors, we expect our

comment letter measures to be positive, i.e., the more comment letter activity, the higher

the underpricing. However, if the SEC review process does serve to level the playing

field in term of disclosure quality among all issuers, the comment letter variables, which

reflect the pre-revised information, should not correlate with the underpricing RUNUP.

Our final empirical tests relate the level of information asymmetry among

investors in the post-IPO period to the attributes to the IPO/comment letter process. We

use the relative bid-ask spread to proxy for the level of information asymmetry among

26

investors. As in Schrand and Verrecchia (2005), we calculate the average intra-day

relative spread over the window starting from 15 days after the first trading date and

ending 100 days after the first trading date (“RSPREAD”). Following prior literature,

we control for firm size, price, trading volume and return variability (Benston and

Hagerman (1974), McInish andWood (1992), Roulstone (2003)). We calculate all the

control variables as daily averages over the same window as the bid-ask spreads. We

obtain data on intra-day bid and ask quotes from TAQ and data on control variables from

CRSP daily tapes.

4. Empirical Tests

4.1 Determinants of Comment Letter Process

Our first set of empirical tests examines the association between the comment

letter/IPO process variables and the hypothesized determinants of these variables, as

described above. Table 5 presents the results.

The first column in Table 5 Panel A reports the results for the TIME_TO_IPO

specification. The results suggest that CEO expertise has an adverse effect on the length

of time from the filing date of the first S-1/SB-2 to the date the IPO becomes effective. If

the CEO is experienced, the number of days to IPO is 31 days higher (at the mean,

significant at the 5% level.) Based on the distribution reported in Table 3, Panel A, we

suspect that an outlier may be driving this result. In future drafts, we will run tests

excluding extreme observations. In contrast, corporate governance seems to play a role

in determining the time-to-IPO. Specifically, consistent with predictions, the existence of

an outside blockholder decreases the length of the going public process (coefficient of

27

-48.804, p-value of 0.04). This is consistent with an outside blockholder providing a

monitoring role during the offering process.

Next we examine the determinants of the DRAFTS measure. The results reported

in the second column of Table 5 Panel A show that, on average, firms that have a Big 4

auditor and a more reputable underwriter as captured by the Carter-Manaster Underwriter

Score, file a greater number of amendments to S-1/SB-2s (coefficients of 0.940 and 0.178

and p-values of 0.01 and 0.03, respectively.) These results are counter to our prediction

that a Big 4 auditor and a prestigious underwriter would improve the efficiency of the

IPO process. We hesitate to attribute this result to incentives that Big 4 and higher

reputation underwriting firms might have (relative to non-Big 4 firms and lower

reputation underwriters) to lengthen the IPO process. One potential explanation is that

the IPO firms that are associated with Big 4 audit firms and more prestigious

underwriters are larger and more complex and therefore require more diligence and effort

to complete their filings.

The third column in Table 5, Panel A reports the results for the specification

where the dependent variable is ROUNDS (the number of letters per firm). This

specification has the lowest explanatory power with an adjusted R2 of 10.26%. Here, the

Big 4 auditor dummy is again positive and significant (coefficient of 0.650, p-value of

0.05). Again, we are unclear about the interpretation of this result. We will explore this

issue in future drafts.

Next, we examine the total number of comments from the first round comment

letter (COMMENTS). When the CFO has prior public company management

experience, COMMENTS is lower (coefficient of -9.465, p-value of 0.07). Thus, being

28

through the public company reporting experience before appears to create a significant

amount of knowledge capital for the firm in the sense that CFO experience leads to 9.465

fewer first round comments. If COMMENTS represents the change in quality of

disclosure from the “initial level,” then firms where the CFO has prior public company

experience have a higher “initial level” and therefore, have less change in quality of

compliance and/or disclosure as a result of the comment letter process.

Tuning our attention to corporate governance related variables, we find that the

presence of an outside, independent blockholder is associated with greater number of

number of comments. This result goes against our governance prediction that an outside

shareholder would mitigate disclosure quality issues. Perhaps the presence of a

blockholder itself draws more comments from the SEC in terms of use of the IPO

proceeds to distribute to existing shareholders, whether the blockholder will also be

selling their shares, and related party transactions with the blockholder. We will explore

this conjecture in future versions of the paper. We also find that CEO beneficial

ownership (and CEO beneficial ownership squared) is positively related to the total

number of comments that a firm receives (coefficients of 35.529 and .011, p-value of

0.01 and 0.00, respectively). Thus, managers with more at stake with the IPO receive a

larger number of comments. One explanation is that CEOs with high ownership stakes

take inordinate control of the comment letter process and do not allow the experts (the

CFOs, the auditors, etc.) to improve the efficiency of the process.

We report the results for ISSUES, the number of coded issues from the first round

comment letter, in the final column of Table 5, Panel A. The coefficient of CFO prior

public company experience is again negative and significant (coefficient of -6.246, p-

29

value of 0.01). Taken with the results from the COMMENTS specification, these results

are consistent with the CFO having more of an impact on the detailed process of

addressing accounting and financial reporting matters in the comment letters through this

more efficient management of the comment letter process. Finally, being a firm in a

regulated industry (banking- or utility-related industry) is associated with fewer coded

issues (coefficient of -5.642, p-value of 0.02). This result is intuitive, because regulated

firms have existing clear-cut external reporting obligations.

In additional analysis (results not reported), we explore the effect of other

managerial and firm characteristics on the attributes of the comment letter/IPO process.

First we examine the incremental role of CEO and CFO age and find that the comment

letter/IPO process is not associated with the age of the CEO/CFO. Second, we test

whether firms that are listed in NYSE are different from other firms with respect to their

comment letter/IPO process. Our results do not provide support for such a difference.

Finally, we replace the REGULATED variable with indicator variables for the industries

outlined in Table 2, Panel A. While the results of this analysis point to industry effects,

the addition of 16 indicator variables is taxing given the small sample size. Thus we

report the results of the more parsimonious specification in Table 5. None of the above

analyses affect our benchmark results.

Because the content of the comment letters may be more reflective of a firm’s

disclosure environment than the total number of comments or coded issues, we examine

the determinants of each of the 6 categories of coded issues. These results are presented

in Table 5, Panel B. The table reports that CFO experience reduces the number of issues

related to auditing and reporting issues (coefficient of -1.149, p-value of 0.02) and the

30

number of issues related to accounting, financing reporting and disclosure topics

(coefficient of -2.332, p-value of 0.01). These results are intuitive, given that past

experience can lead a CFO to take action to avoid certain accounting-related issues.

Being in a regulated industry is also associated with fewer issues related to

accounting, financing reporting and disclosure topics (coefficient of -2.233, p-value of

0.01). This makes sense as firms in regulated industries likely have experience in

disclosing information related to such issues as part of their regulatory filings.

In sum, the determinants of the IPO and comment letter process differ depending

on the attribute we focus on. Having a Big 4 auditor extends the IPO and comment letter

process, as measured by number of amendments to S-1/SB-2 firms file and the number of

rounds of comment letters they go through. Managerial expertise comes into play when

we examine the details of the comment letter process, that is, the total number of

comments in the first round (COMMENTS) and the number of coded issues in the first

round (ISSUES). In particular, the existence of an experienced CFO contributes to fewer

comments and fewer issues in those comments.

4.2 Effects of the Comment Letter Process

Our initial attempt of examining the effects of the comment letter process focuses

on the association between attributes of the comment letter process and measures of an

IPO firm’s information environment. We employ uncertainty (as measured by first-day

underpricing) and post-IPO measures of liquidity (as measured by post-IPO relative bid-

ask spreads and trading depth) as proxies for firms’ information environment.

Table 6, panel A presents the results of OLS regressions where first-day

underpricing (RUNUP) is the dependent variable. Each column in panel A reports results

31

of a specification that uses a different attribute of the IPO/comment letter process as an

independent variable. The coefficients on all of the IPO/comment letter process variables

are insignificant.

Panel B of Table 6 presents results of OLS regressions where dollar trading depth

is the dependent variable. Again, each specification reports results using a different

attribute of the IPO/comment letter process as an independent variable. The

IPO/comment letter process variables are significant in two of the specifications. The

fourth and fifth columns of Table 6, Panel B show that a higher number of comments and

a higher number of coded issues are associated with lower dollar depth. Thus, there is

weak evidence that the details of the comment letter process reflect the information

environment of IPO firms.

Panel C of Table 6 reports results using relative bid-ask spread as the dependent

variable. The coefficients on all of the IPO process variables are highly insignificant.

Note that the explanatory power of the specifications in Table 6 Panel C is quite high (R2

around 70%) and the control variables are significant in the predicted direction in most of

the regressions. Untabulated results using trading depth as a dependent variable were

similarly weak.

To summarize, except for the results using dollar depth as a measure of the firm’s

information environment, none of our IPO/comment letter process variables are

associated with proxies for IPO firms’ information environments. There are a number of

potential explanations. First, the comment letters are not publicly available to potential

investors at the time of the offering. Although we believe that the information in these

letters could alter investors’ beliefs about the quality of a firm’s disclosure and reporting

32

environment, potential investors would have to infer this information from the time-to-

IPO and/or number and nature of amendments to the S-1/SB-1 filings. It is possible that

our ex-post summary of the attributes of these letters does not map into the perceptions of

disclosure quality at the time of filing. Second, an outcome of the comment letter process

is that quality of disclosure for all IPO firms is improved at least up to the SEC’s

threshold level of “issuance quality.” It is possible that as a result of the comment letter

process the cross-sectional variation in disclosure quality among our sample firms is too

small, that is the comment letter process is too successful, to have an impact on

uncertainty and information asymmetry. In fact, prior studies point out that the

information environment in the U.S. is rich enough that it may be difficult to find

disclosure-related results on market-based measures (Leuz and Verrecchia (2000)).

Future drafts of the paper will consider associations between the comment letter

attributes and alternate measures of the information environment, such as accruals

surrounding the offering and analyst following.

5. Conclusions and Discussion of Future Work

A review of the comment letter process for newly-public firms reveals that there

is much variation in the number and type of comments that firms receive. We attempt to

code and classify these comments to extract more information out of the letters. Using

various measures that summarize the comment letter process, we first attempt to examine

determinants of the comment letter process variables. We found that firms with CFOs

with prior public company management experience appeared to undergo a smoother

filing process, where smoother was defined as fewer drafts of registration statements

33

submitted and lower numbers of comments and issues from the SEC. CEO

characteristics do not appear to affect the comment letter process. Governance attributes

appear to play a role in the efficiency of the IPO process, measured as the time from

filing an initial offering document through the IPO effective date.

Thus far, our tests on the association between our comment letter process

measures and an IPO firm’s information environment have yielded no significant results.

Future work will include an examination of the correlation between our process measures

and post-IPO performance, as measured by stock returns and operating performance.

Additionally, we expect that a fruitful avenue to explore will be the examination of

analysts’ coverage as a proxy for information about analysts’ expectations of future

prospects (Das, Guo, and Zhang (2006)). We hypothesize that analysts’ superiority of

information and their selectivity of coverage will be associated with the results of the

comment letter process. Finally, we hope to examine the correlation between our process

measures and discretionary accruals. We will examine accruals from the initial S-1

filing, accruals from the final prospectus, and accruals in the post-IPO periods.

As our sample of firms matures as publicly-traded companies, we expect to

examine the association between our offering process measures and future financial

reporting events for a company, such as future comment letters, future restatements, and

future economic activity (e.g., becoming an acquisition target or filing for bankruptcy).

34

References

Baiman, S. and R. Verrecchia, 1996, The Relation Among Capital Markets, Financial Disclosure, Production Efficiency, and Insider Trading, Journal of Accounting Research 34: 1-22.

Beatty, Randolph P., 1989, Auditor Reputation and the Pricing of Initial Public Offerings,

The Accounting Review 64: 693-709. Beatty, Randolph P., and Jay R. Ritter, 1986, Investment Banking, Reputation, and the

Underpricing of Initial Public Offerings, Journal of Financial Economics 15: 213-232.

Bertrand, Marianne, and Antoinette Schoar, 2003, Managing with Style: The Effect of

Managers on Firm Policies, The Quarterly Journal of Economic 118: 1169 – 1208.

Brown, Stephen, and Stephen A. Hillegeist, 2006, How Disclosure Quality Affects the

Level of Information Asymmetry, Emory University and INSEAD working paper. Dechow, Patricia M., Richard G. Sloan, and Amy P. Sweeney, 1996, Causes and

Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC, Contemporary Accounting Research 13: 1-36.

Diamond, D., and R. Verrecchia, 1991, Disclosure, Liquidity, and the Cost of Capital,

Journal of Finance 46: 1325-1359. Erickson, Merle, Michelle Hanlon, and Edward L. Maydew, 2004, How Much Will Firms

Pay for Earnings That Do Not Exist? Evidence of Taxes Paid on Allegedly Fraudulent Earnings, Accounting Review 79: 387-408.

Fishman, Michael, and Kathleen Hagerty, 1989, Disclosure Decisions by Firms and the

Competition for Price Efficiency, The Journal of Finance 44: 633-646. Healy, Paul, Amy Hutton, and Krishna Palepu, 1999, Stock Performance and

Intermediation Changes Surrounding Sustained Increases in Disclosure, Contemporary Accounting Research (Fall): 485-520.

Healy, Paul, and Krishna Palepu, 2001, Information Asymmetry, Corporate Disclosure,

and the Capital Markets: A Review of the Empirical Disclosure Literature, Journal of Accounting and Economics 31: 405-440.

Leone, Andrew J., Steve Rock, and Michael Willenborg, 2003, Disclosure of Intended

Use of Proceeds and Underpricing in Initial Public Offerings, University of Rochester, University of Colorado, and University of Connecticut working paper.

35

Leuz, Christian, and Robert E. Verrecchia, 2000, The Economic Consequences of Increased Disclosure, Journal of Accounting Research 38, Supplement: 91 – 124.

Malmendier, Ulrike and Geoffrey Tate, 2005, CEO Overconfidence and Corporate

Investment, The Journal of Finance 60: 2661-2700. Merton, R., 1987, A Simple Model of Capital Market Equilibrium with Incomplete

Information, The Journal of Finance 43: 483-510. Ritter, Jay R., 2006, Some Factoids About the 2005 IPO Market, University of Florida

working document (see http://bear.cba.ufl.edu/ritter). Rock, K., 1986, Why New Issues are Underpriced, Journal of Financial Economics 15:

187-212. Schrand, Catherine, and Robert E. Verrecchia, 2005, Information Disclosure and Adverse

Selection Explanations for IPO Underpricing, The Wharton School, University of Pennsylvania working paper.

Titman, Sheridan, and Brett Trueman, 1986, Information Quality and the Valuation of

New Issues, Journal of Accounting and Economics 8: 159-172. Verrecchia, Robert E., 1983, Discretionary Disclosure, Journal of Accounting and

Economics 5: 179-194. Verrecchia, Robert E., 2001, Essays on Disclosure, Journal of Accounting and

Economics 32: 97-180. Verrecchia, Robert E., and Joseph Weber, 2006, Redacted Disclosure, Journal of

Accounting Research, forthcoming. Welker, J.P., 1995, Disclosure Policy, Information Asymmetry, and Liquidity in Equity

Markets, Contemporary Accounting Research (Spring): 801-827.

36

APPENDIX A The IPO Process

I. Begin Work on Registration Statement (T – approximately 4 months) • Draft underwriting agreement • Complete audits of financial statements • Resolve legal matters • Draft registration statement (S-1 or SB-2)

↓ II. File the Registration Statement (Timing depends on comment letter process)

• File the S-1 or SB-2 with the SEC • Obtain clearance under state securities laws • “Cooling off” period (no marketing efforts until comment letters are cleared)

SEC issues first round comment letter (approximately 30 days after the S-1 or SB-2 is filed)

Company revises the registration statement and replies in writing to SEC’s comment letter

An amendment to the S-1 or SB-2 is filed The SEC may issue additional comment letters, requiring additional replies

and amendments

↓ III. Road Shows (T – 60 to – 45 days)

• Marketing meetings at various cities in the US and abroad with potential underwriting syndicate members, portfolio managers, securities analysts, brokers and institutional investors

↓ IV. Pricing Meeting (T – 6 to –1 days)

• Establishes the public offering price for offering

↓ V. Execution of Underwriting Agreement and Effective Date (T = 0)

• Public offering begins • Underwriting agreement signed • Stock may now qualify for trading on an exchange or on NASDAQ

↓ VI. Closing (T + 5)

• Firm receives IPO proceeds • Underwriter receives the firm’s securities

Source: The Going Public Handbook, PricewaterhouseCoopers LLP, 2005.

37

APPENDIX B Categories of Coded Issues from Comment Letters

Each of the comment letters from the SEC to the filing company’s management was coded by hand to classify every comment into one or more of 103 coded issues. A firm scored a “1” under a particular coded issue if it was mentioned in a comment letter for the firm, and a “0” if there was no mention of the issue in the comment letter. Thus, a firm could receive a maximum score of 103 if every single issue was mentioned in the comment letter. These 103 coded issues, in turn, were assigned on an ad hoc basis into 6 categories, based on the nature of the coded issues. The 6 categories are described below along with the coded issues that are included in each category. I. Accounting Issues (Maximum Firm Score = 15 Coded Issues) These items represent issues or questions that the SEC posed relating to how specific accounting items were represented in the financial statements and disclosures. 1. Accounting Cite: A request for a specific citation from accounting literature as a basis for the

treatment that the firm used to account for a particular transaction; (29 of 95 first round letters or 30.5% of first round letters)

2. Accounting Change: A request for further information regarding a change is accounting principle or change in accounting estimate that was either inadequately disclosed or not disclosed at all; (3 of 95 first round letters or 3.2% of first round letters)

3. Audit Issue: A request for additional information regarding the firm’s relationship with its audit firm, including issues with auditor changes, issues with matters disclosed (or that should have been disclosed) in the audit report, and issues with the auditor’s consent letter for the offering; (46 of 95 first round letters or 48.4% of first round letters)

4. Clarify Accounting Policy: A general request to clarify or provide more information about the firm’s accounting treatment regarding a particular transaction or series of transactions. This request is more about how a firm applies a given standard, not what accounting standard was used (see Accounting Cite); (71 of 95 first round letters or 74.7% of first round letters)

5. Critical Accounting Policies and Estimates: Questions or issues about the firm’s critical accounting policy disclosures (or lack of disclosures) and disclosures about the firm’s bases for accounting estimates; (33 of 95 first round letters or 34.7% of first round letters)

6. Financial Statement Formatting: Comments about the general formatting of the financial statements and tables in the footnote disclosures; (46 of 95 first round letters or 48.4% of first round letters)

7. Financial Statement Restatement: Questions about a restatement of the financial statements presented in the offering document; (3 of 95 first round letters or 3.2% of first round letters)

8. Internal Controls: Questions about the firm’s internal control systems and the testing, if any, of controls; (10 of 95 first round letters or 10.5% of first round letters)

9. Materiality Issues: Comments or questions about the firm’s obligation to disclose material information in the filing, including the reiteration of the definition of materiality; (7 of 95 first round letters or 7.4% of first round letters)

10. New Accounting Pronouncements: Comments regarding a firm’s disclosures of the effects of newly-issued accounting pronouncements, particularly the firm’s consideration of any material impact that the pronouncements may have on the firm’s financial results; (14 of 95 first round letters or 14.7% of first round letters)

11. Not Following GAAP: An indication by the reviewer that the firm does not appear to be following the tenets of GAAP in recording a particular type of transaction or series of transactions; (28 of 95 first round letters or 29.5% of first round letters)

12. Pro Forma Disclosures: Questions or critiques about either the firm’s pro forma disclosures (effects of changes in the firm’s capital structure based on the offering or effects of a merger transaction) and non-GAAP financial disclosures (EBITDA or another non-GAAP measure); (51 of 95 first round letters or 53.7% of first round letters)

13. Quality of Earnings or Cash Flows: Explicit comments or questions regarding the quality of the firm’s earnings or cash flows as the firm has presented their results, usually accompanied by comments

38

to balance the tone of the disclosure or make risks/negative results a more prominent part of the disclosure; (16 of 95 first round letters or 16.8% of first round letters)

14. Reportable Conditions: Request for additional information and disclosure related to a reportable condition or other irregularity that was identified by management related to the firm’s internal controls; (4 of 95 first round letters or 4.2% of first round letters)

15. Update Financial Statements: A reminder comment of the firm’s obligation to update its financial statements during the filing process when the audited financial statements go “stale” (e.g., firms must include an audited balance sheet within 135 days of the date of filing the registration statement.); (50 of 95 first round letters or 52.6% of first round letters)

II. Accounting/Financial Reporting/Disclosure Topics (Maximum Firm Score = 30 Coded Issues) These items represent questions or issues posed by the SEC related to the accounting, financial reporting, or disclosure of specific transactions or classes of transactions. 16. Acquisitions: Questions or comments about the accounting treatment and disclosures of business

combination transactions, including purchase price allocations; (45 of 95 first round letters or 47.4% of first round letters)

17. Capital Expenditures: Questions or issues about the firm’s investment in property, plant and equipment, particularly its accounting treatment related to capitalization of these items; (34 of 95 first round letters or 35.8% of first round letters)

18. Claims, Commitments and Contingencies: Issues or comments raised about the firm’s accounting for and disclosure of it obligations and long-term commitments, including legal matters; (78 of 95 first round letters or 82.1% of first round letters)

19. Contra Asset Accounts: A request for information about contra asset-type accounts, such as the allowance for doubtful accounts or loan losses for loan receivables; (30 of 95 first round letters or 31.6% of first round letters)

20. Depreciation/Amortization: Questions or issues related to the firm’s depreciation and amortization policies; (24 of 95 first round letters or 25.3% of first round letters)

21. Derivatives: Questions related to the accounting treatment for the firm’s derivative and hedging programs, including the application of hedge accounting models and hedge effectiveness assessments; (26 of 95 first round letters or 27.4% of first round letters)

22. Environmental Reserves: Questions or comments related to the firm’s environmental remediation obligations; (17 of 95 first round letters or 17.9% of first round letters)

23. Earnings per Share: Questions related to the computation of earnings per share disclosures; (32 of 95 first round letters or 33.7% of first round letters)

24. Employee Stock Options and Fair Value: Questions or comments related to the application of SFAS 123(R), Share-Based Payments, particularly regarding the valuation methods used, including assumptions such as expected volatility and expected term; (56 of 95 first round letters or 58.9% of first round letters)

25. Expenses and Cost Allocations: Requests for information about expense items and cost allocations; 51 of 95 first round letters or 53.7% of first round letters)

26. Goodwill and Impairment: Questions or comments related to the firm’s goodwill balance and impairment testing, including the definition of reporting units and valuation issues; (30 of 95 first round letters or 31.6% of first round letters)

27. Intangibles: Questions or comments regarding the firm’s accounting treatment for intangible assets, including how they were valued and/or whether they should have an indefinite life; (24 of 95 first round letters or 25.3% of first round letters)

28. Intercompany Accounts: Requests for information about a firm’s accounting and disclosures for intercompany transactions; (7 of 95 first round letters or 7.4% of first round letters)

29. Inventories: Questions or comments about a firms inventory and related accounting policies; (18 of 95 first round letters or 18.9% of first round letters)

30. Investments: Questions or comments about a firms investment balances, including the accounting treatment based on ownership percentages and fair value determinations; (30 of 95 first round letters or 31.6% of first round letters)

39

31. Leases: Questions or comments about the accounting for leasing transactions, including terms of leases, the treatment of rental escalations, and the treatment of leasehold improvements; (24 of 95 first round letters or 25.3% of first round letters)

32. Minority Interests: Questions or comments regarding the accounting for minority interests; (6 of 95 first round letters or 6.3% of first round letters)

33. Off-Balance Sheet Arrangements: Questions or comments relating to the understanding of off-balance sheet arrangements, including special purpose entities, and their material effects; (19 of 95 first round letters or 20.0% of first round letters)

34. Other Fair Value Assessments: Questions or comments regarding valuation assessments for all balance sheet items, excluding acquisition-related and stock option-related fair value determinations; (42 of 95 first round letters or 44.2% of first round letters)

35. Pensions and Other Employee Benefits: Questions or issues about the assumptions and estimates, including the assumed discount rate, and funding obligations related to a firm’s benefit obligations; (15 of 95 first round letters or 15.8% of first round letters)

36. Preferred Stock: Questions or comments regarding the firm’s preferred stock, in particular, any conversion-related issues and/or implications as a result of the IPO; (46 of 95 first round letters or 48.4% of first round letters)

37. Related Party Transactions: Requests for additional clarification or details surrounding the accounting for the firm’s transactions with related parties, including management, board members, and other insiders; (71 of 95 first round letters or 74.7% of first round letters)

38. Reserve Accounts: Questions or comments regarding the accounting and disclosure for reserve liabilities such as warranties and other accrued liabilities; (22 of 95 first round letters or 23.2% of first round letters)

39. Restructuring Reserves: Questions or comments specifically related to restructuring reserve liabilities, including severance costs; (13 of 95 first round letters or 13.7% of first round letters)

40. Revenue Recognition: Questions or comments related to a firm’s method of accounting for revenues and material considerations in evaluating the quality and uncertainties surrounding their revenue generating activity; (50 of 95 first round letters or 52.6% of first round letters)

41. Segment Reporting: Questions about the identification of operating segments, aggregation of operating segments, and information about geographic areas in which the firm operates; (40 of 95 first round letters or 42.1% of first round letters)

42. Shareholders’ Equity: Questions regarding the accounting treatment of items included as part of shareholders’ equity, including other comprehensive income and retained earnings (accumulated deficits); (26 of 95 first round letters or 27.4% of first round letters)

43. Statement of Cash Flow Classification: Questions or comments about the classification and presentation of the statement of cash flows; emphasis is made on ensuring an accurate presentation of the firm’s actual cash receipts and cash payments based on activity (operating, investing, or financing); (18 of 95 first round letters or 18.9% of first round letters)

44. Subsequent Events: Requests for additional information and/or disclosure related to event occurring after the date the financial statement were prepared as of; (17 of 95 first round letters or 17.9% of first round letters)

45. Tax Accounting: Questions or comments regarding the firm’s income tax disclosures, particularly items disclosed in their income tax footnotes such as the allowance on deferred tax assets; (30 of 95 first round letters or 31.6% of first round letters)

III. Business Issues (Maximum Firm Score = 18 Coded Issues) These items represent questions or comments about the firm’s operating, financing, or investing matters disclosed in the offering document. 46. Backlog: Questions about the firm’s disclosures of its order backlog; (7 of 95 first round letters or

7.4% of first round letters) 47. Competitive Environment: Comments or questions about the firm’s competitive environment and its

strategies in addressing competitive forces; (71 of 95 first round letters or 74.7% of first round letters) 48. Components of Revenue: Requests for information about disclosure and reporting about the firm’s

various sources of revenue, including the separation of product and service revenues; (60 of 95 first round letters or 63.2% of first round letters)

40

49. Customer Profiles: Requests for information about the firm’s key customers, including any customer concentration; (50 of 95 first round letters or 52.6% of first round letters)

50. Debt Covenants: Questions or issues surrounding the company’s contractual covenants related to its outstanding debt, including disclosure about the firm’s compliance with these covenants; (35 of 95 first round letters or 36.8 % of first round letters)

51. Dividends: Requests for more information regarding the firm’s dividend policy, including recent past dividend declarations and/or payouts and support for statements regarding the firm’s intention to pay future dividends; (40 of 95 first round letters or 42.1% of first round letters)

52. Going Concern: Questions or comments regarding the firm’s ability to continue as a going concern; (7 of 95 first round letters or 7.4% of first round letters)

53. Intellectual Property: Questions or comments about the firms disclosure of the terms of their intellectual property and any claims against their intellectual property; (32 of 95 first round letters or 33.7% of first round letters)

54. Key Performance Indicators: Requests for additional information about disclosures of the key performance metrics in a firm’s industry; (22 of 95 first round letters or 23.2% of first round letters)

55. Liquidity: Questions or comments regarding the firm’s liquidity disclosures, including how the statement of cash flows translates into operating cash inflows and outflows, and sensitivity analysis related to future cash flow needs; (61 of 95 first round letters or 64.2% of first round letters)

56. Material Contracts: Comments regarding material contracts and their terms that are disclosed or should be disclosed and included as exhibits in the firm’s registration document; (65 of 95 first round letters or 68.4% of first round letters)

57. Management Discussion and Analysis: Questions or comments about the type of information disclosed or that should have been disclosed as part of the filing; (66 of 95 first round letters or 69.5% of first round letters)

58. Proceeds: Questions or comments regarding the use of the offering proceeds obtained from the IPO; (73 of 95 first round letters or 76.8% of first round letters)

59. Properties and Facilities: Questions or comments surrounding the description of the locations in which the firm operates; (26 of 95 first round letters or 27.4% of first round letters)

60. Risk Factors: Questions or comments regarding the identification and disclosure of the firm’s material risk factors, including the potential impact of the factors on the firm’s operations and cash flows; (83 of 95 first round letters or 87.4% of first round letters)

61. Research and Development Projects: Comments regarding the identification and disclosure of the firm’s material R&D projects; (20 of 95 first round letters or 21.1% of first round letters)

62. Terms of Debt/Credit Arrangements: Questions or comments about the disclosures of the material terms of the firm’s debt and credit arrangements; (64 of 95 first round letters or 67.4% of first round letters)

63. Trends: A request to provide additional information regarding the material trends underlying the firm’s reported operations and cash flows, as well as any forward-looking information about the effects of trends on future operations and cash flows; (55 of 95 first round letters or 57.9% of first round letters)

IV. Tone and Level of Disclosure Issues (Maximum Firm Score = 19 Coded Issues) These items represent requests for additional information or questions about the manner in which the firm presented its disclosures and the level of disclosure that the firm presented in its initial S-1 or SB-2 filing. 64. Balanced Discussion: A request for management to balance the overly-positive tone of their

disclosures with more discussion of the risks and downside of their business and operating environment; (63 of 95 first round letters or 66.3% of first round letters)

65. Clarify Subject: General requests to provide more specific information regarding a disclosure issue; (73 of 95 first round letters or 76.8% of first round letters)

66. Confidentiality Request: Represents the SEC’s acknowledgement of the firm’s request for confidential treatment of various components of the firm’s responses to the SEC comment letters; (8 of 95 first round letters or 8.4% of first round letters)

67. Confusing Format: A notation by the SEC that a particular disclosure or presentation is in a difficult-to-follow format. It is often accompanied by a suggestion from the SEC for improved presentation; (12 of 95 first round letters or 12.6% of first round letters)

41

68. Disaggregation: A request to provide a finer level of detail related to disclosures or questions about line-item classification; (42 of 95 first round letters or 44.2% of first round letters)

69. Forward-looking Information: Comments or questions about the firm’s disclosure of forward-looking information; (18 of 95 first round letters or 18.9% of first round letters)

70. General Formatting: Comments or questions regarding the overall, non-financial statement formatting of the offering document; (78 of 95 first round letters or 82.1% of first round letters)

71. Inaccuracies: An observation that there are inaccuracies in the filing document, including misstatements of fact or numbers that do not reconcile within the document; (19 of 95 first round letters or 20.0% of first round letters)

72. Incomplete: An annotation that the registration document is incomplete in some manner and must be completed before the registration becomes effective; (57 of 95 first round letters or 60.0% of first round letters)

73. Inconsistencies: A comment regarding disclosures that conflict with each other; (46 of 95 first round letters or 48.4% of first round letters)

74. Independent Support: A request for independent, third-party support for statements included in the filing document; often, these requests relate to disclosures about fair value disclosures or the firm’s market position; (72 of 95 first round letters or 75.8% of first round letters)

75. Make Prominent: A request to alter the format of the filing to highlight or improve the visibility of a particular disclosure; (11 of 95 first round letters or 11.6% of first round letters)

76. Plain English: Requests to modify the language used in the disclosures to eliminate obfuscating language, industry-specific terminology, or excessive use of acronyms; (52 of 95 first round letters or 54.7% of first round letters)

77. Quantify Amounts: Request to quantify amounts in disclosures where an issue is discussed in qualitative terms; (63 of 95 first round letters or 66.3% of first round letters)

78. Repetitive Disclosures: A comment that management has unnecessarily repeated information or disclosures throughout sections of the filing without providing additional substance; (40 of 95 first round letters or 42.1% of first round letters)

79. Specific to Firm: A request to make the firm’s disclosures less generic and boilerplate, and to add content that applies the disclosures to the particular circumstances of the firm; (57 of 95 first round letters or 60.0% of first round letters)

80. Supplemental Information: Requests for supplemental information that would support assertions in the firm’s disclosures; this information may or may not be further incorporated in the disclosures, but may just be information that the SEC wanted to review (e.g., reviewing a drug effectiveness study that supports certain disclosures made by the firm in its filing); (48 of 95 first round letters or 50.5% of first round letters)

81. Supporting Calculations: A request to provide detailed support for the calculations that result in the numbers or figures disclosed in the offering document; (23 of 95 first round letters or 24.2% of first round letters)

82. Too Detailed: Comments that certain portions of the filing documents, such as the summary sections, contained too much detail and information that would be more appropriately included in later sections of the filing; (29 of 95 first round letters or 30.5% of first round letters)

V. Corporate Governance Matters (Maximum Firm Score = 10 Coded Issues) These items summarize questions or comments about the firm’s corporate governance mechanisms as disclosed in the offering document. 83. Anti-Takeover Provisions: A request for additional information or disclosure related to any anti-

takeover provisions that are included in the firm’s by-laws; (14 of 95 first round letters or 14.7% of first round letters)

84. Board of Directors: Questions or comments about the firm’s board of directors, including issues about board composition, independence, and the board’s compensation; (36 of 95 first round letters or 37.9% of first round letters)

85. General Corporate Governance: Questions or comments about a company’s overall corporate governance structure, including issues with the audit committees; (16 of 95 first round letters or 16.8% of first round letters)

42

86. Executive/Employee-Related Matters: Requests for additional information about employee-related matters, including labor issues and employment contracts; (56 of 95 first round letters or 58.9% of first round letters)

87. Management Performance Metrics: Questions or comments about metrics that a firm (typically through its board of directors) uses to assess management performance, in order to determine annual bonuses, for example; (15 of 95 first round letters or 15.8% of first round letters)

88. Organizational Structure: Comments to provide clarification about the firm’s organizational structure, both before and after the offering; (36 of 95 first round letters or 37.9 of first round letters)

89. Other Compensation: Questions or issues regarding the reporting and disclosure of non-stock-based forms of executive compensation; (40 of 95 first round letters or 42.1% of first round letters)

90. Principal Stockholders: Comments regarding the disclosures of significant shareholders, especially, disclosures regarding the interrelationships between the shareholders and the firm’s operations; (66 of 95 first round letters or 69.5% of first round letters)

91. Signatures: Request to identify the individuals, particularly the chief accounting executive, who will be responsible for signing the firm’s financial statement certifications under Section 302 of the Sarbanes-Oxley Act; (9 of 95 first round letters or 9.5% of first round letters)

92. Stock-based Compensation: Questions or comments regarding the terms of the stock-based compensation plans for the firm’s executives and employees; (63 of 95 first round letters or 66.3% of first round letters)

VI. Offering-related Issues (Maximum Firm Score = 11 Coded Issues) These items represent questions or issues raised by the SEC regarding matters associated with the initial public offering per se. These items relate to procedural issues or regulatory compliance issues. 93. Changes in Shares Outstanding: Comments requesting more information or disclosure about the

effects of changes in shares outstanding related to the IPO; (67 of 95 first round letters or 70.5% of first round letters)

94. Consent Letters: Comments about the format and inclusion of consent letters as part of the filing document; (45 of 95 first round letters or 47.4% of first round letters)

95. Conversion: Questions or comments regarding the effects of the firm’s conversion from a non-corporate form of business that occurred prior to or in conjunction with the IPO; (28 of 95 first round letters or 29.5% of first round letters)

96. Exhibits: Typically, a request to submit necessary exhibits to the registration statements; (68 of 95 first round letters or 71.6% of first round letters)

97. Fees and Expenses: Comments related to the disclosure of fees and expenses related to the offering; (15 of 95 first round letters or 15.8% of first round letters)

98. Offering Price: Comments related to the offering price, or proposed range of the offering price; (65 of 95 first round letters or 68.4% of first round letters)

99. Percent Offered: Request for additional information regarding the percent of firm shares being offered, especially as related to pre-offering selling shareholders; (52 of 95 first round letters or 54.7% of first round letters)

100. Shares Outstanding: Questions or comments regarding the number of shares that the firm has outstanding, including the effects of the IPO; (17 of 95 first round letters or 17.9% of first round letters)

101. Tax Status: Questions or comments related to disclosures of the income tax implications for existing shareholders at the time of the offering; (23 of 95 first round letters or 24.2% of first round letters)

102. Underwriting Matters: Requests for additional information and disclosure related to the firm’s underwriting procedures and the firm’s agreement with its underwriting firm; (83 of 95 first round letters or 87.4% of first round letters)

103. Why Filing: A request to disclose additional information about why the firm is undergoing an initial public offering; (9 of 95 first round letters or 9.5% of first round letters)

43

APPENDIX C

Variable Definitions

IPO and Comment Letter Process Variables

TIME_TO_IPO = The number of days from the filing date of the initial S-1/SB-2 to the effective date of the IPO.

DRAFTS = The number of registration statements a given firm files, that is the initial S-1/SB-2 statement and the subsequent amendments.

ROUNDS = The number of comment letters (concerning S-1/SB-2 filings) from the SEC to a given firm.

TURNAROUND = The number of days from the filing date of the initial S-1/SB-2 to the date of the first comment letter from the SEC.

COMMENTS = The number of comments a given firm receives from the SEC in the first round comment letter.

ISSUES = The number of coded issues a given firm receives from the SEC in the first round comment letters.

ACCT_ISSUES = The number of coded issues that a given firm receives form the SEC in the first round of comment letters related to how specific accounting items are represented in the financial statements and disclosures (See Appendix B for further details).

TOPICS = The number of coded issues that a given firm receives form the SEC in the first round of comment letters related to the accounting, financial reporting or disclosure of specific transactions or classes of transactions (See Appendix B for further details).

BUSINESS = The number of coded issues that a given firm receives form the SEC in the first round of comment letters the firm’s operating, financing or investing matters disclosed in the offering document (See Appendix B for further details).

TONE_LEVEL = The number of coded issues that a given firm receives form the SEC in the first round of comment letters related to the manner in which the firm presents its disclosures and the level of disclosure (See Appendix B for further details).

CORP_GOV = The number of coded issues that a given firm receives form the SEC in the first round of comment letters related to the firm’s corporate governance mechanisms as disclosed in the registration statement (See Appendix B for further details).

OFFERING = The number of coded issues that a given firm receives form the SEC in the first round of comment letters related to matters associated with the initial public offering per se (See Appendix B for further details).

44

Managerial Expertise Variables

CEO_EXPER = An indicator variable that is equal to one if the firm’s CEO has prior experience in a public company, and zero otherwise.

CEO_MBA = An indicator variable that is equal to one if the firm’s CEO has a Master of Business Administration degree, and zero otherwise.

CFO_EXPER = An indicator variable that is equal to one if the firm’s CFO has prior experience in a public company, and zero otherwise.

CEO_CPA = An indicator variable that is equal to one if the firm’s CEO is a Certified Public Accountant, and zero otherwise.

Corporate Governance Variables

MAN_BOARD = The fraction of board seats that are held by managers of the company.

BLOCK = An indicator variable that is equal to one if the firm has an outside blockholder (a non-employee shareholder that holds at least 5% of the shares outstanding) prior to the IPO, and zero otherwise.

CEO_CHAIR = An indicator variable that is equal to one if the CEO of the firm is the Chairman of the Board, and zero otherwise.

CEO_OWN = The percentage of shares held by the CEO prior to the IPO.

Information Environment Variables

RSPREAD = The average intra-day relative bid-ask spread (ask less bid scaled by the bid-ask average) calculated over the window starting 15 days and ending 100 days after the first trading date of the firm.

DEPTH = The average intra-day depth (offer size plus bid size) calculated over the window starting 15 days and ending 100 days after the first trading date of the firm.

DOLLARDEPTH = The average intra-day dollar depth (offer size times ask plus bid size times bid, divided by two) calculated over the window starting 15 days and ending 100 days after the first trading date of the firm.

RUNUP = The degree of first-day underpricing calculated as the closing bid price at the end of the first day less the initial offering price, scaled by the initial offering price.

45

Control Variables

BIG4 = An indicator variable that is equal to one if the firm’s auditor is a Big 4 audit firm, and zero otherwise.

CM_RANK = The Carter-Manaster rank of the firm’s lead underwriter.

REGULATED = An indicator variable that is equal to one if the firm is in a regulated industry (Electric, Gas, Sanitary Services (SIC code 49); Depository Institutions, Credit Institutions, Security Brokers (SIC codes 60 – 62); Insurance Carriers (SIC code 63); Real Estate, Holding and Other Investment Offices (SIC code 67)).

SIZE = Natural logarithm of the assets of the firm (in thousands) as of the last fiscal period end prior to the IPO.

PCT_RETAINED = Percentage of shares retained by the firm after the IPO.

AGE = Natural logarithm of the age of the firm at the time of the IPO calculated as the number of years since the year in which the firm was founded.

OFFERING_AMT = Natural logarithm of the offering amount calculated as number of shares offered times the offering price.

PRICE = Natural logarithm of average daily closing price calculated over the window starting 15 days and ending 100 days after the first trading date of the firm.

TURNOVER = Natural logarithm of average daily trading volume scaled by the number of shares outstanding calculated over the window starting 15 days and ending 100 days after the first trading date of the firm.

STDRET = Natural logarithm of standard deviation of daily returns calculated over the window starting 15 days and ending 100 days after the first trading date of the firm.

MV = Natural logarithm of average daily market value (closing price time number of shares outstanding) calculated over the window starting 15 days and ending 100 days after the first trading date of the firm.

46

Table 1 – Sample Selection

Table 1 summarizes the sample selection process. The resulting final sample is comprised of firms whose stock began trading on dates ranging from 10/28/2004 through 12/21/2005. S-1s are general forms of registration for all companies offering securities to the public. SB-2s are the optional forms for the registration of securities by small business issuers. IPOs from SDC with filing dates from 8/1/2004 through 12/31/2005 196

Less International filings (on form F-1) (15)

Observations that are erroneously classified as IPOs (6)

IPOs with no comment letters filed on EDGAR as of 9/30/2006 (45)

Sample Firms 130

47

Table 2 – Description of Sample Firms

Table 2 summarizes the distribution of sample firms by industry (Panel A) and exchange listing (Panel B). Regulated industry groupings are those that are regulated for financial reporting purposes, above and beyond what is required by SEC regulations. Panel A Distribution of Sample Firms by Industry

SIC Code N Percent Regulated?

Mining and Construction 12-15 6 4.6% NoManufacturing (Furniture and Fixtures, Chemicals) 25-28 15 11.5% NoManufacturing (Computer Equipment, Electronics, Instruments) 35-36, 38 21 16.2% NoManufacturing (Transportation Equipment) 37 2 1.5% NoMotor Freight and Water Transportation 41, 42, 44 9 6.9% NoCommunications 48 5 3.8% NoElectric, Gas, Sanitary Services 49 1 0.8% YesWholesale and Retail Trade 50-59 11 8.5% NoDepository Institutions, Credit Institutions, Security Brokers 60-62 18 13.8% YesInsurance Carriers 63 7 5.4% YesReal Estate 65 1 0.8% YesHolding and Other Investment Offices 67 10 7.7% YesHotels and Lodging 70 2 1.5% NoBusiness Services 73 15 11.5% NoHealth and Educational Services 80, 82 4 3.1% NoOther Services 75, 79, 87 3 2.3% No

Total 130 100.0%

Panel B Distribution of Sample Firms by ExchangeListing

Frequency Percent

New York Stock Exchange 34 26.2%American Stock Exchange 8 6.2%NASDAQ 88 67.7%

Total 130 100.0%

Table 3 – Description of Comment Letters

Table 3 describes various attributes of the comment letters. Panel A provides descriptive statistics for IPO and comment letter process variables. Panel B provides descriptive statistics by reviewer. Each reviewer represents the individual from the SEC’s Division of Corporate Finance who was the signatory on the comment letter. We randomly assign a letter to represent each reviewer who signed the first-round comment letters for at least seven of our sample firms. The remaining reviewers are grouped together. To date we have coded the comment letters for 95 out of the 130 sample firms. All variables are defined in Appendix C. Appendix B provides an in-depth description of the categories of coded issues. Panel A Descriptive Statistics for IPO and Comment Letter Process Variables

Variable N Maximum Possible Mean Std. Deviation Min Q1 Median Q3 Max

TIME_TO_IPO 130 - 118.4 53.40 28 82 104 136 366DRAFTS 130 - 5.9 1.90 2 5 6 7 12ROUNDS 130 - 3.4 1.36 1 3 3 4 9TURNAROUND 130 - 28.50 4.20 7 27 28 30 43.00COMMENTS 130 - 60.8 26.91 1 43 59 73 137ISSUES 95 103 41.60 12.70 2 34 44 51 64.00 ACCT_ISSUES 95 15 4.30 2.15 0 3 4 6 11.00 TOPICS 95 30 9.90 4.43 0 7 10 13 19.00 BUSINESS 95 18 8.80 3.31 0 7 9 12 15.00 TONE_LEVEL 95 19 8.46 3.15 0 7 9 11 14.00 CORP_GOV 95 10 3.70 1.66 0 3 4 5 7.00 OFFERING 95 11 4.96 1.80 0 4 5 6 9.00

49

Panel B Descriptive Statistics for IPO and Comment Letter Process Variables by Reviewer

N Mean Median Mean Median Mean Median Mean Median

Reviewer A 20 132.6 115 3.1 3 26.4 27 66.9 66Reviewer B 7 116.1 103 3.4 3 30.3 31 69.0 62Reviewer C 12 105.7 105 3.4 3 26.7 25 59.9 60Reviewer D 7 120.1 111 2.8 3 29.9 29 56.9 59Reviewer E 8 101.5 98 3.3 3 28.4 28 68.0 66Reviewer F 9 111.6 93 3.0 3 30.9 30 58.1 47Other Reviewers 67 119.5 100 3.6 3 28.9 29 58.3 54

All Reviewers 130 118.4 104 3.4 3 28.5 28 60.8 59

N Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median

Reviewer A 16 41.8 45 4.1 4 9.3 10 9.4 10 8.9 10 4.1 4 4.6 5Reviewer B 7 46.0 46 4.9 5 9.9 10 9.9 9 10.3 10 3.0 3 6.7 7Reviewer C 7 39.0 37 3.7 3 10.0 11 9.1 9 7.7 8 3.0 3 4.9 5Reviewer D 6 46.0 45 5.7 6 10.3 10 8.0 8 10.8 12 3.7 4 5.5 6Reviewer E 5 46.2 50 5.2 5 12.4 13 9.4 9 9.2 10 2.8 3 5.8 6Reviewer F 9 37.3 33 5.1 5 8.7 7 7.8 7 8.2 8 2.7 2 4.0 4Other Reviewers 45 40.9 45 4.0 4 10.0 11 8.6 9 7.9 8 4.1 4 4.9 5

All Reviewers 95 41.6 44 4.3 4 9.9 10 8.8 9 8.5 9 3.7 4 5.0 5

ISSUES

COMMENTSTURNAROUNDROUNDSTIME_TO_IPO

ACCT_ISSUES OFFERINGTOPICS BUSINESS TONE_LEVEL CORP_GOV

Table 4 – Descriptive Statistics

Table 4 presents descriptive statistics for managerial expertise, corporate governance, information environment and control variables for the sample firms. All variables are defined in Appendix C.

Variable N Mean Std. Deviation Min Q1 Median Q3 Max

Managerial Expertise VariablesCEO_EXPER 130 0.39 - - - - - -CEO_MBA 130 0.23 - - - - - -CFO_EXPER 130 0.47 - - - - - -CFO_CPA 130 0.44 - - - - - -

Corporate Governance VariablesMAN_BOARD 130 0.24 0.17 0.00 0.13 0.17 0.29 1.00BLOCK 130 0.59 - - - - - -CEO_CHAIR 130 0.44 - - - - - -CEO_OWN 130 0.12 0.21 0.00 0.01 0.03 0.12 1.00

Information Environment VariablesRSPREAD 127 0.01 0.01 0.00 0.01 0.01 0.02 0.09DEPTH 127 17.01 17.51 2.00 7.78 12.63 19.8 155.86DOLLARDEPTH 127 125.16 101.89 16.8 55.44 83.61 162.06 481.76RUNUP 130 -1.67 2.85 -17.56 -2.15 -0.79 0.02 1.48

Control VariablesBIG4 130 0.77 - - - - - -CM_RANK 130 7.49 2.36 0.00 7.10 8.27 9.10 9.10REGULATED 130 0.28 - - - - - -ASSETS (in thousands) 130 992 4,443 0 29 123 561 48,765SALES (in thousands) 130 428 1,234 0 12 59 270 111,436PCT_RETAINED 130 0.63 0.20 0.01 0.54 0.68 0.75 1.00AGE 130 15.13 23.49 0 4 8 15 123OFFERING_AMT 130 166 219 0 49 83 189 1,386PRICE 127 16.57 7.99 3.84 10.75 15.88 21.19 46.65TURNOVER 127 0.006 0.007 0.000 0.002 0.004 0.007 0.050STDRET 125 0.026 0.013 0.005 0.018 0.023 0.032 0.099MV (in thousands) 127 639 1,558 13 144 290 657 16,355

51

Table 5 – Determinants of the IPO/Comment Letter Process

Table 5 presents the results for the determinants of the IPO/comment letter process. Panel A presents the OLS results where the dependent variable is one of the five IPO/comment letter process variables. Panel B presents the OLS results where the dependent variable is one of the six coded issues categories. We denote significance at 1%, 5% and 10% level with ***, **, *, respectively. All variables are defined in Appendix C.

Panel A OLS Results for IPO and Comment Letter Process Variables

Expected Sign

Intercept ? 52.267 3.856 *** 1.905 *** 27.281 * 32.447 ***

(0.18) (0.00) (0.01) (0.07) (0.00)CEO_EXPER - 31.290 ** 0.620 -0.126 2.877 1.281

(0.05) (0.16) (0.70) 0.57 (0.62)CEO_MBA - 15.083 0.075 0.069 -5.239 -1.181

(0.42) (0.84) (0.82) (0.25) 0.69CFO_EXPER - -27.419 -0.461 0.045 -9.465 * -6.246 ***

(0.12) (0.31) (0.88) (0.07) (0.01)CFO_CPA - 8.072 0.092 0.020 1.926 3.604

(0.56) (0.81) (0.94) (0.69) (0.17)MAN_BOARD + 69.000 0.571 0.741 19.737 6.065

(0.12) (0.66) (0.25) (0.21) (0.46)BLOCK - -48.804 ** -0.460 -0.460 11.830 ** -0.081

(0.04) (0.34) (0.23) (0.05) (0.98)CEO_CHAIR + 28.549 0.341 0.382 -1.149 -0.641

(0.15) (0.36) (0.16) (0.83) (0.82)CEO_OWN ? -55.590 0.537 -0.480 35.529 *** 5.870

(0.20) (0.57) (0.48) (0.01) (0.25)CEO_OWN 2 ? -0.003 0.000 0.003 0.011 *** 0.007

(0.76) (0.25) (0.25) (0.00) (0.69)BIG4 - 27.161 0.940 * 0.650 ** 8.559 6.829

(0.28) (0.01) (0.05) (0.24) (0.13)CM_RANK - -0.372 0.178 ** 0.060 0.732 0.025

(0.92) (0.03) (0.29) (0.53) (0.97)REGULATED - 3.431 -0.600 -0.304 -3.711 -5.642 **

(0.85) (0.16) (0.36) (0.54) (0.02)SIZE - 1.774 0.004 0.055 0.943 0.389

(0.51) (0.95) (0.33) (0.37) (0.53)

N 127 127 127 127 93Adjusted R2 14.91% 17.91% 10.26% 19.60% 20.36%F-Statistic 1.77 2.62 4.69 32.09 6.09Pr > F (0.06) (0.00) (0.00) (0.00) (0.00)

Dependent Variable

(p-value)

TIME_TO_IPO DRAFTS ROUNDS COMMENTS ISSUES

Coefficient(p-value)

Coefficient(p-value)

Coefficient(p-value)

Coefficient(p-value)

Coefficient

52

Panel B OLS Results for Coded Issues Categories

Expected Sign

Intercept ? 4.691 *** 5.609 * 7.499 *** 5.929 ** 3.133 *** 4.491 ***

(0.01) (0.08) (0.00) (0.02) (0.01) (0.00)CEO_EXPER - 0.519 -0.546 0.477 -0.009 0.629 0.188

(0.33) (0.51) (0.51) (0.99) (0.13) (0.67)CEO_MBA - -0.030 -0.025 -0.896 -0.962 0.482 0.217

0.96 (0.98) (0.29) (0.26) (0.25) (0.63)CFO_EXPER - -1.149 ** -2.332 *** -0.929 -0.940 -0.085 -0.472

(0.02) (0.01) (0.21) (0.25) (0.83) (0.26)CFO_CPA - -0.071 1.276 1.035 0.192 0.728 * 0.268

(0.87) (0.14) (0.15) (0.80) (0.06) (0.49)MAN_BOARD + 1.452 1.507 -0.791 3.736 -0.563 0.747

(0.30) (0.55) (0.68) (0.11) (0.57) (0.47)BLOCK - -0.386 -0.514 0.200 0.744 0.279 -0.304

(0.45) (0.60) (0.82) (0.34) (0.49) (0.52)CEO_CHAIR + -0.279 -0.888 0.143 -0.061 0.405 -0.190

(0.58) (0.34) (0.87) (0.94) (0.29) (0.68)CEO_OWN ? 0.895 1.211 2.073 0.696 0.639 0.198

(0.42) (0.49) (0.22) (0.65) (0.40) (0.85)CEO_OWN 2 ? 0.000 -0.002 *** 0.001 ** 0.000 0.000 * -0.001 ***

(0.82) (0.01) (0.04) (0.82) (0.10) (0.00)BIG4 - 1.014 1.972 1.753 * 1.494 -0.024 0.685

(0.15) (0.18) (0.10) (0.20) (0.97) (0.33)CM_RANK - -0.202 -0.028 -0.022 0.023 0.138 * 0.039

(0.16) (0.90) (0.86) (0.90) (0.09) (0.75)REGULATED - -0.341 -2.233 *** -1.141 -1.058 0.373 -0.774 *

(0.51) (0.01) (0.12) (0.16) (0.29) (0.09)SIZE - 0.064 0.403 ** 0.013 0.065 -0.132 * -0.008

(0.58) (0.05) (0.94) (0.65) (0.08) (0.94)

N 93 93 93 93 93 93Adjusted R2 16.30% 26.50% 17.53% 13.89% 19.93% 12.54%F-Statistic 2.66 4.99 9.50 3.41 2.63 10.20Pr > F (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)

ACCT_ISSUES TOPICS BUSINESS TONE_LEVEL CORP_GOV

Dependent Variables

OFFERING

Coefficient Coefficient Coefficient Coefficient Coefficient(p-value)

Coefficient(p-value)(p-value) (p-value) (p-value) (p-value)

Table 6 – Relation between IPO/Comment Letter Process and Information Environment

Table 6 presents the results for the determinants of the IPO/comment letter process. Panel A presents the OLS results where the dependent variable is RUNUP and each model adopts an alternative IPO/comment letter process measure as an independent variable. Panel B presents the OLS results where the dependent variable is DOLLARDEPTH and each model adopts an alternative IPO/comment letter process measure as an independent variable. Panel C presents the OLS results where the dependent variable is RSPREAD and each model adopts an alternative IPO/comment letter process measure as an independent variable. We denote significance at 1%, 5% and 10% level with ***, **, *, respectively. All variables are defined in Appendix C. Panel A OLS Results for First-day Underpricing as a Measure of the Information Environment

Expected Sign

Intercept ? -21.363 ** -21.930 ** -21.334 ** -21.083 ** -19.846 *(0.02) (0.02) (0.02) (0.02) (0.10)

IPO/Comment Letter Process Measure ? 0.003 0.129 0.014 0.007 -0.004(0.51) (0.46) (0.95) (0.53) (0.92)

PCT_RETAINED + -1.181 -1.276 -1.278 -1.230 -0.759(0.76) (0.75) (0.75) (0.75) (0.86)

AGE - 0.514 ** 0.576 *** 0.553 *** 0.552 *** 0.358(0.02) (0.01) (0.01) (0.01) (0.21)

OFFERING_AMT + -1.772 -1.826 -1.781 -1.772 -1.540(0.15) (0.14) (0.15) (0.15) (0.28)

BIG4 - 0.574 0.519 0.631 0.572 0.907(0.65) (0.66) (0.61) (0.65) (0.62)

CM_RANK - -0.084 -0.109 -0.096 -0.084 -0.097(0.55) (0.44) (0.48) (0.53) (0.58)

MV ? 2.423 * 2.458 * 2.441 * 2.383 * 2.258(0.06) (0.06) (0.06) (0.06) (0.15)

N 114 114 114 114 83Adjusted R2 18.82% 18.96% 18.51% 18.75% 14.92%F-Statistic 2.35 2.46 2.38 2.44 1.51Pr > F (0.03) (0.02) (0.03) (0.02) (0.18)

COMMENTS

IPO Process Measures

(p-value)

ISSUES

Coefficient Coefficient Coefficient Coefficient Coefficient

TIME_TO_IPO DRAFTS ROUNDS

(p-value) (p-value) (p-value) (p-value)

54

Panel B OLS Results for Dollar Depth as a Measure of the Information Environment

Expected Sign

Intercept ? -430.726 *** -449.641 *** -442.162 *** -434.766 *** -431.760 ***(0.00) (0.00) (0.00) (0.00) (0.00)

IPO/Comment Letter Process Measure - -0.064 1.757 0.202 -0.498 * -1.696 ***(0.41) (0.63) (0.96) (0.06) (0.00)

PRICE - -160.479 *** -157.277 *** -159.148 *** -165.174 *** -151.347 ***(0.00) (0.00) (0.00) (0.00) (0.00)

PRICE 2 + 0.174 *** 0.172 *** 0.172 *** 0.182 *** 0.173 ***(0.00) (0.00) (0.00) (0.00) (0.00)

TURNOVER + 35.478 *** 34.013 *** 34.380 *** 33.708 *** 37.816 ***(0.00) (0.00) (0.00) (0.00) (0.00)

STDRET - -82.135 *** -81.826 *** -80.234 *** -77.304 *** -86.185 ***(0.00) (0.00) (0.00) (0.00) (0.00)

MV + 65.022 *** 64.059 *** 65.262 *** 68.734 *** 67.926 ***(0.00) (0.00) (0.00) (0.00) (0.00)

N 125 125 125 125 93Adjusted R2 55.19% 55.05% 54.97% 56.58% 63.94%F-Statistic 21.2 21.39 21.94 22.64 23.99Pr > F (0.00) (0.00) (0.00) (0.00) (0.00)

IPO Process Measures

TIME_TO_IPO DRAFTS ROUNDS COMMENTS ISSUES

Coefficient(p-value) (p-value) (p-value) (p-value) (p-value)

Coefficient Coefficient Coefficient Coefficient

55

Panel C OLS Results for Relative Bid-Ask Spread as a Measure of the Information Environment

Expected Sign

Intercept ? 0.099 *** 0.100 *** 0.100 *** 0.100 *** 0.110 ***(0.00) (0.00) (0.00) (0.00) (0.00)

IPO/Comment Letter Process Measure ? 0.000 0.000 0.000 0.000 0.000(0.58) (0.83) (0.71) (0.56) (0.94)

PRICE - -0.006 -0.006 -0.006 -0.006 -0.009 *(0.16) (0.20) (0.16) (0.15) (0.10)

PRICE 2 + 0.000 * 0.000 * 0.000 * 0.000 * 0.000 *(0.09) (0.09) (0.10) (0.09) (0.08)

TURNOVER - -0.005 *** -0.005 *** -0.005 *** -0.005 *** -0.004 ***(0.00) (0.00) (0.00) (0.00) (0.00)

STDRET + 0.010 *** 0.010 *** 0.010 *** 0.010 *** 0.009 ***(0.00) (0.00) (0.00) (0.00) (0.00)

MV - -0.005 *** -0.005 *** -0.005 *** -0.005 *** -0.005 ***(0.00) (0.00) (0.00) (0.00) (0.00)

N 125 125 125 125 93Adjusted R2 70.73% 70.66% 70.66% 70.71% 70.71%F-Statistic 25.92 27.09 27.39 27.86 20.57Pr > F (0.00) (0.00) (0.00) (0.00) (0.00)

IPO Process Measures

TIME_TO_IPO DRAFTS ROUNDS COMMENTS ISSUES

Coefficient(p-value) (p-value) (p-value) (p-value) (p-value)

Coefficient Coefficient Coefficient Coefficient