Do Revenues Matter More Than Earnings for Initial Public Offerings?

We demonstrate that investors in initial public offering (IPO) firms value revenues and that the number of U.S. Securities and Exchange Commission (SEC) revenue recognition comment letters issued on the S-1 registration statement are positively associated with reported revenues. We also find that IPO managers report revenues opportunistically in the fiscal year just prior to the offer. In additional analysis, we find that discretionary revenues are associated with significantly higher first day IPO stock returns but significantly lower 1 year stock returns. Our results are consistent with the incentives of managers to report revenues opportunistically outweighing the higher monitoring and regulatory scrutiny pre-IPO.