Flying under the Radar: Confidential Filings and Pre-IPO Lawsuits

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2019-08-26
Authors
Esmer, Burcu
Ozel, Naim Bugra
Sridharan, Suhas
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Despite strong incentives to increase visibility and disclosure in advance of initial public offerings (IPOs), prior research finds many firms take advantage of the confidential filing provisions of the JOBS Act of 2012 to obscure their fundraising pursuits. We posit that one potential explanation for this puzzling phenomenon relates to reduced litigation risk, since confidential filing makes IPO activity less salient to the outsiders of the firm. Using a comprehensive sample of lawsuits against IPO firms from 2008 to 2014, we find evidence consistent with this hypothesis. Relative to a matched sample of firms that file their registration publicly, firms that file confidentially under the provisions of the JOBS Act experience 38% fewer lawsuits during the pre-IPO period. Moreover, our findings suggest that filing confidentially is particularly effective in shielding IPO firms from possibly strategic lawsuits by other businesses and from lawsuits that lack legal merit. We show that each lawsuit filed by a business against the IPO firm is associated with more than 4% increase in IPO underpricing. Our findings suggest that an unintended consequence of the confidential filing provision under the JOBS Act is to provide IPO firms a means to reduce litigation risk at the cost of increased information asymmetry.
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Corporate disclosure, litigation risk, corporate lawsuits, initial public offerings
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