Economic Consequences of Voluntary Disclosure Before Seasoned Equity Offerings: The Impact of the 2005 Securities Offering Reform

In 2005, the SEC enacted the Securities Offering Reform (Reform), which relaxes 'gun jumping' restrictions by providing safe harbors for certain disclosures before equity offerings. The SEC argues that the disclosure restrictions are unnecessary, as they prevent timely and broad information flow before an important corporate event. However, Reform opponents argue that the gun-jumping restrictions were put in place to protect investors from managers conditioning the market (i.e., hyping the stock), and the relaxation of these restrictions will increase managers' incentives and ability to mislead the market before an offering. We examine the impact of the Reform on management voluntary disclosure behavior before equity offerings and the associated economic consequences. Consistent with the intent of the regulation, we find that firms provide significantly more pre-offering disclosures after the Reform. Our analyses suggest that there is no evidence of hyping after the Reform. Rather, we find that these pre-offering disclosures are associated with a decrease in information asymmetry, per the SEC's intent. Our results suggest that the relaxation of pre-SEO disclosure restrictions leads to a reduction in the cost of raising equity capital.