Auditing just one company at random makes other firms behave better, simply because they use the same broker.
SSRN · March 17, 2026 · 6308899
The Takeaway
We usually think of audits as local events, but this study found that when regulators randomly inspect one IPO, other companies under the same underwriter immediately start cleaning up their own books and making more honest disclosures. This 'spillover deterrence' shows that regulators don't need to catch everyone to change market-wide behavior; they just need to target the intermediaries.
From the abstract
We examine whether direct information acquisition by regulators improves IPO oversight by exploiting China's randomized pre-IPO on-site inspections. Despite the small fraction of IPO firms selected for inspection, we find significant spillover effects on concurrent, non-inspected IPOs underwritten by the same brokerage firms. These IPOs exhibit lower earnings management, fewer financial misstatements, and more comprehensive and specific prospectus disclosures that emphasize issues identified dur