Saturday, June 1, 2019
Jeremy McClane at Illinois recently posted to SSRN a truly fascinating study of boilerplate in IPO prospectuses (okay, I gather it may have been out for a while but it was only posted to SSRN recently and that’s how I learn anything these days). In Boilerplate and the Impact of Disclosure in Securities Dealmaking, he concludes that while the inclusion of “boilerplate” – namely, generic disclosures that copy from similar deals – contributes to lower legal fees (though not lower underwriter and audit fees), it ultimately costs firms in terms of greater IPO underpricing and greater litigation risk. (It should be noted that he does not analyze litigation outcomes - compare to the risk factor paper, described below). Boilerplate is also associated with greater divergence in analyst opinion, and greater (upward) price revision in the pre-IPO period. All of this, he concludes, demonstrates that boilerplate contributes to greater information asymmetry.
In a previous post, I described a working paper, Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language, that examines boilerplate in SEC risk factors. The authors of that study concluded that – perversely – boilerplate is rewarded by judges in litigation and, crucially, by the SEC, where it is associated with fewer comment letters.
McClaine’s findings are in a similar vein. Despite the SEC’s (purported) efforts to stamp out boilerplate, he discovers that excess levels of boilerplate are not associated with more pre-offering prospectus amendments or with more SEC commentary. (Caveat: His study period includes post-JOBS Act filings but I’m not entirely clear how he treats draft registration statements for the purposes of this analysis).
A final note: McClane speculates on how boilerplate could impact investor assessments, given the common expectation that few investors actually, you know, read SEC filings to begin with. He points out that professional investors and analysts do the reading, and their determinations may ultimately drive pricing. He also notes that lawyers and underwriters draft IPO disclosures and that process may prompt them to ask questions, which ultimately generates more information. I’d add to the mix that these days, computers do a lot of the reading (especially once trading begins), which raises the possibility that subtle variations are more detectable than they were in days’ past. I’d love to see more analysis along these lines that divide filings by time period.