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what we do in the in our in our research paper is we look at the ipo market so firms that aren't publicly traded yet uh
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but are going public on the new york stock exchange or the or the nasdaq and we look at the price that they go
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public at and sort of their future returns and the volatility or risk associated with those
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companies and then we correlate those measures with the amount of disclosure that the firm
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has at the time of its if it's of its ipo so there was a recent rule that came out
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back in 2012 called the jobs act and the jobs act allowed firms to reduce the amount of information that they
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provide to investors so you know a lot of your your viewers your readers are probably familiar with
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you know sec filings you've got to file an sec financial statements all these all these
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sorts of accounting accounting statements what the jobs act does is it reduces the
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amount of information that the firm is required to provide to the equity market before going public
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and a natural question is when you reduce the amount of information are you increasing sort of
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the risk of the company how do investors respond to that and so we try and answer
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that answer that question by looking at to see what actually happens after the regulation
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what we end up finding in the in the study is that after the jobs act the ipos that are going public are
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actually substantially riskier so if you just think about imagining a world in which the sec requires all of
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the ipos to go through a screening process and issue these mandatory disclosures
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and then the legislative branch of government comes along and says well you know let's
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actually sort of scale that back let's only require them to do two years worth
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of screening as opposed to the prior three years so you can imagine that that's going to
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have the effect of potentially bringing different companies to the market so the analogy would be you know you go
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to a used car lot and suppose the government requires that when you purchase the used car the car
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dealer has to give you basically a spec sheet on what the car's you know been
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doing what the car's life was and then the government comes along and says well
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we're not going to require that anymore car dealers can do it voluntarily so now when you go to the car dealer
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there's some you know some cars have the spec sheet and other cars don't have the
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spec sheet what do you infer about the cars that don't offer you or the car dealers that
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don't offer you the spec sheet and so this is what we call a lemons problem where you have sort of companies that
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aren't disclosing as much anymore and the question is why are they not disclosing much anymore because now
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you've taken a mandatory rule and you've made it and you've made it voluntary and
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we find that those companies that don't disclose you know are indeed much much
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uh much riskier and so that's sort of the sort of the key punchline of the study is when you
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observe a firm scale back its disclosure they're doing that for a reason and investors sort of become more
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uncertain and that generates risk for the company we were actually surprised by the
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magnitude of the effect that we saw um you know there's really two two schools
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of thought when it comes to you know reduction in disclosure one school of thought is that you know government
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requirements and regulations for disclosure are burdensome on firms and so they're excessively costly you have
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to hire lawyers you have to hire accountants you have to hire auditors you know to go over and to scrutinize
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your financial statements and the purpose of the jobs act at least the stated purpose by the proponents was
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to reduce that cost and to allow more small businesses to go public because now they don't have
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to pay as much fees to lawyers and to accountants and to and so we expected to see some effect
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because you're going to see smaller firms entering the ipo market and naturally those smaller firms will be
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riskier but we were surprised at the magnitude of the effect that we found for even
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very large firms so it wasn't just the small firms that were taking advantage
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of these provisions it was also the you know the firms well with a billion dollars in revenue and even there we
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found a substantial uh substantial effect on the order to uh on the order of six to 12 percent uh change in in
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what we call ipo under pricing uh and uh i think a five percent uh shift in equity volatility which is you know in
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the grand scheme of things that's a substantial uh substantial cost of the company even though it's not explicit
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so you know back to my uh to my earlier uh you know remark about the the used car
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lot now you have a situation where the used car salesman is two cars both red same
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makes same model one comes with the disclosure of its history one doesn't the used car salesman can't sell the car
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that doesn't come with the disclosure for the same price as the car that comes
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with the disclosure so he marks the price of the car without the disclosure down and so what we're measuring in our
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study is how much the bankers mark down the price of firms that don't have the disclosure and that
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looks like between a six and 12 percent discount and that's a substantial amount
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when you're thinking about a multi-million dollar company so that's a specific cost of the jobs act even
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though it's not an explicit cost it's not you know saving money on underwriters
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well i think until our study there hadn't really been any evidence on what the effect of the jobs act was on the
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amount that or the amount that the firm could raise on under pricing or on volatility and so if you actually look
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at what the ceos are saying in the popular press a lot of ceos are coming out in favor of it especially the the tech
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companies so twitter was uh was one company who took advantage of this and what they're saying is you know it's
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saving us lots of money in terms of you know we don't have to hire lawyers we
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don't have to hire accountants we don't have to have people prepare the you know
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as many years of financial statements and so we can save in terms of the explicit costs of preparing our
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disclosures with the sec the problem with that sort of reasoning is is it ignores the implicit costs
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right so if i have these two cars and they're both red they're both the same
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make and the same model one comes with a disclosure of the car's history the other one doesn't i can't
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sell the car that doesn't come with the disclosure for the same price so i could sell both cars for 5 000 that
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one car i can't sell for 5000 because it doesn't come with a disclosure i can
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only sell it for 4 500. so that you can think of as the difference between those
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two is a 500 implicit cost so what we're finding is is that while the jobs act is saving money on
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uh sort of preparation costs and is allowing smaller firms to go public because those firms no longer have these
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burdensome explicit costs it's actually increasing the indirect costs because
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firms can't go ipo for the same prices that they could have before they can't
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raise as much money when they disclose less and so that creates an indirect cost
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that i think many practitioners and many managers aren't necessarily taking into
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account when they're making the trade-off about should they reduce their disclosure under the jobs act
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so let's take the the company first um so what the company's concerned about is
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presumably the company wants to maximize its ipo offer price they want to get they want to sell the company for as
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much as they possibly can on the public market so let's take let's just assume
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that that's the objectives of the managers and that they're benevolent and
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that's what they're trying to do so what we find is that the discount that investors apply to firms who are
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taking advantage of these reduced disclosure regulations is about a six to eight percent discount and you know
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sometimes it even goes as high as 12. so for example if a firm is going public perhaps it might be able to raise 100
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let's say hypothetically 100 million dollars in its ipo with a six to eight percent discount
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it's only going to be able to raise say 92 or 94 of that which means it will
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only be able to raise say 92 million so the indirect cost of the reduced disclosure for that firm is about eight
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million dollars you know between six and twelve let's just pick eight because it's in
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the middle so they have to trade off that eight million dollar discount that investors apply
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against the savings that they get from you know not having to prepare additional disclosures
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right so you know add up all of the costs that you would pay for additional year of audited financial statements for
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additional year of you know litigation protection from your lawyers and whatnot and see if it comes out to about you
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know between six to 12 percent of what you think your market value should be that's under the story of the firm or
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the managers being benevolent and having shareholders interests in mind and trying to sell the firm for the highest
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price another story which is more cynical is that one of the reduced disclosures
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is that they the firm no longer has to disclose the compensation of the top five executives it just has to disclose
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compensation for three executives so another thing that the firm can do under this sort of legislation is that
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you know it can reduce the amount of information that it provides to the market about compensation
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so on the one hand that might shield the firm from sort of um unjust public criticism of how lucrative the
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compensation deal is which could be a good thing but if that compensation is excess compensation if
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the ceo and the top five guys are being paid too much the market wouldn't actually know that at the time that the
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that the firm goes goes public so from the company's perspective if they're
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trying to maximize their offer price they need to trade off the explicit cost which is the savings and the litigation
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the accountants and whatnot versus the indirect cost and our paper is really about the indirect cost which is this
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somewhere between six and twelve percent discount so that's sort of what they
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need to uh to take into account so that's a new cost of going public that wasn't there uh
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previously for the investors side let's we could think about this as there being sort of
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two broad types of investor investors sophisticated investors and unsophisticated investors
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let's take unsophisticated investors first these are the people who um you know maybe they have a cursory
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knowledge of financial statements and accounting information if that and one can argue whether
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unsophisticated investors should even be taking part in the ipo or not but let's
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just assume that there are some unsophisticated investors who are sort of investing in ipos we certainly saw
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that during the during the tech bubble of the of the 2000s these investors are getting less
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information from the firm so relative to the sophisticated investors we think that they're actually worse off
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because the sophisticated investors can make up for any lack in public information by collecting private
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information whereas unsophisticated investors they can't go out there and collect private information you can
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think of you know like your grandmother or your mom or your dad being one of these sort
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of unsophisticated unsophisticated investors with rudimentary understanding they may or may not even realize that
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the amount of public disclosure that the firm is providing has shrunk what that means is that the
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sophisticated investors let's talk about you know the big investment banks the the
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underwriters they can get all of the information that they want from uh you know from either
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other sources or from the firm so their information set we think is generally unchanged whereas what's
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changing is the information set of the unsophisticated investor and this is one reason why we think the
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sec was pushing back on on making these new rules that congress mandated them to
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do because the sdc's mission is really to protect the individual investor and anytime you have a reduction in the
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amount of public information individual investors generally do generally do worse this is why we had
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these rules in the first place to you know mandate firms to disclose as much as they could so let's go back to
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the car example you've got an auto mechanic who's going to the you know to the car dealership
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lot he's your sophisticated investor he sees the two cars they're the same makes
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same model same color sees one with the disclosure sees the other one without the disclosure right
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he can detect without the disclosure whether that that from that car that doesn't have the disclosure is actually
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a good car or not whereas you know if i go to the used car car a lot i would not be able to tell the
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difference between a good car and a bad car i'm going to rely on the disclosure
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to tell me that so sophisticated investors don't rely on the disclosures as much as the unsophisticated investors
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and so sophisticated investors aren't hurt as much when the disclosure gets removed
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i want to be clear the jobs act has many many different titles and covers more than just disclosure by ipo firms it
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does a lot of different things it you know changes the rules for crowdsourcing and crowdfunding of of
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projects and so there's a lot of different faces of the jobs act that we don't really examine we just picked out
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this sort of one provision or one title of the jobs act and examined that's that
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its effect so i don't want to say that you know the entirety of the act um is necessarily harmful or or
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beneficial we're just picking one little aspect of the act and looking at how
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that affected the sort of the ipo market and documenting that there are perhaps unintended consequences
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or maybe even intended consequences of the uh of the act what's next i think is you
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know the act has been relatively new uh so the body of literature is just starting
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there's only one published paper on the jobs act you know i have this paper and
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there's a couple others that are that are just starting up but you know anytime you have a firm
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that reduces or chooses to reduce the amount of information it provides whether it be about its compensation
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arrangements with its executives whether it be about its accounting performance whether it be about you know management
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discussion and analysis you know that's going to have a ripple effect on all
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kinds of other intermediaries that rely on public information so are now credit rating agencies going to have to you
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know to rely on different sets of information are equity analysts going to have to rely on
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different sets of information so you know we just looked at you could think of like the market consequences
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how it gets into price and how it gets into volatility but we haven't actually
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looked at well how does it affect all of these different intermediaries that are relying on the firm's
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disclosures and public information and so i think that's where sort of the next
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step would be for examining sort of the first two titles of the of the jobs act which is what we do which is about a
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reduction a reduction in disclosure you