Do SEC regulations constrain offer price revisions of IPOs?

This paper examines how the price-setting process for Initial Public Offerings (IPOs) is influenced by Securities and Exchange Commission (SEC) regulations. The findings indicate a significant positive relation between underpricing and the presence of a regulatory constraint requiring an amendment for a large price change. IPOs with positive price revisions constrained at the regulatory threshold are significantly more underpriced than IPOs undertaking positive price revisions exceeding the regulatory limit. This association is reversed, albeit weaker, for IPOs with negative price revisions. Offerings with constrained downward price revisions tend to be more over-priced. Exceeding the regulatory threshold and filing an amendment imposes additional cost and risk by delaying the offering. Additionally, incorporating a price change exceeding the regulatory threshold is associated with an increased risk of offering failure. Thus, there are off-setting costs making it rational for issuers to "leave money on the table." In addition, the regulatory constraints provide a possible alternative explanation for the partial adjustment phenomenon. In response to unexpectedly high demand, the issuer might only partially adjust the offer price in order to stay within the allowable pricing threshold and avoiding delaying the offering. For positive revisions of the offer price, the results show a significant positive relationship between underpricing and offer price revision up to the point of the regulatory threshold, while the slope change at the regulatory threshold is negative and significant. I interpret these results as consistent with the hypothesis that SEC regulations are an impediment to accurate pricing of IPOs.