In their study and accompanying paper, “The Jobs Act Did Not Raise IPO Underpricing” Omri Even-Tov, Panos N. Patatoukas and Young S. Yoon, review the effects of the JOBS Act on emerging growth company (EGCs) IPOs. The JOBS Act was signed into law in 2012, now ten years ago, and, among other things, created the IPO on-ramp. It introduced a number of de-risking measures, such as confidential filing of IPO draft registration statements and testing-the-waters communications. The de-burdening measures consist of reduced financial disclosure requirements for EGCs, for example. While prior research indicates that the JOBS Act increased IPO underpricing, the authors hypothesize that changes in the overall IPO market conditions contributed to the increase in IPO underpricing for EGC IPOs. They conducted a difference in differences (DID) research design, reviewing the pre-post JOBS Act change between a treatment group of EGC issuers, excluding smaller reporting companies (SRCs) and a control group of large issuers.
They examined IPO aftermarket first day, week and month returns and reported that EGC issuers had average pre-JOBS act first day returns of 13.5%, increasing to 20.2% following the JOBS Act. While these results are consistent with prior research, the authors state that this is not necessarily evidence of an increase in IPO underpricing due to the JOBS Act. In reviewing the control group of large issuers, they find in the pre-JOBS Act period, first day returns were 6.4%, jumping to 13.0% following the JOBS Act. This indicates a parallel trend in aftermarket returns, even though the control group did not benefit from the JOBS Act provisions. After controlling for issuer characteristics and sector effects for both returns and pre-valuation multiples, their portfolio and regression results indicate that changes in overall IPO market conditions concurrent with the JOBS Act explain the increase in EGC IPO underpricing.
The authors also highlight and investigate the decision of some EGCs to present only two years of audited financial statements and financial data. Notably they find that EGCs that are more likely to adopt these provisions see more IPO overpricing, but they find that this is due to the characteristics of these companies as opposed to their decision to adopt these provisions. Their findings show a correlation between those EGCs that took advantage of the reduced financial statement requirements and higher individual investor ownership and lower sophistication. These EGCs tend to be smaller, more R&D intensive and have higher reports of negative earning and book value compared to EGCs that did not take advantage of the accommodations.
Ultimately, their research deviates from previous research that implies that the JOBS Act increases EGC IPO underpricing.