Joining the Conversation: How Quiet is the IPO Quiet Period?

• In Event: Regulation and Corporate Behavior

Abstract

This study evaluates the IPO quiet period, which restricts managers' ability to publicly communicate in the weeks immediately following the IPO. I investigate the effectiveness of and compliance with the quiet period for a sample of 3,380 IPOs from 1996 through 2011, and report several key findings. Firms significantly increase their communication immediately after the quiet period expires, and this manifests in more firm-specific information in returns. While this suggests the quiet period rules are effective on average, there is non-random variation in this effectiveness. In particular, tests of interaction reveal that the marginal effect of increased communication on firm-specific information processed by the market is greater for firms which are harder to value or receive less-than-expected attention in the aftermarket. Moreover, notwithstanding overall effectiveness, I find wide variation in the level of compliance with the quiet period, and that firms obtain benefits from non-compliance. In particular, firms with more quiet period "noise" obtain more analyst attention and are more likely to meet or beat future consensus forecasts. Collectively, the results suggest that [1] the quiet period rules may be preventing investors from learning useful information in a timely manner, and [2] an apparent lack of SEC enforcement is providing advantages to firms that violate the spirit, if not the letter, of the rules. This calls into question whether the IPO quiet period rules--essentially unchanged for over 80 years--remain relevant and useful in modern equity markets.

Author

• Matthew Chen Cedergren, New York University