Using federal judge ideology as an exogenous measure of issuing firms’ litigation risk, we document that the initial public offerings (IPOs) of the firms headquartered in more liberal circuits are more underpriced. The effect is mitigated when plaintiffs’ pleading standards are more stringent and is amplified when judges have more discretion in their decisions. The effect is also amplified among deep pocketed issuing firms, while it is mitigated among issuing firms hiring reputable intermediaries in the IPO process. The results of additional analysis suggest that issuing firms located in more liberal circuits are more likely to become targets of lawsuits after their IPOs and that these lawsuits are less likely to be dismissed by the courts and result in larger settlements. Collectively, our findings underscore the salience of litigation risk stemming from the issuing firms’ legal environment in driving IPO underpricing.

We document that firms held by mutual fund managers who have public accounting experience earlier in their careers exhibit higher‐quality financial reporting, as evidenced by a lower likelihood of financial statement restatements. Additional evidence shows that fund managers with public accounting experience are more likely to conduct site visits to their portfolio firms and discuss accounting policy–related topics during those visits. Moreover, the restatement likelihood falls after fund managers' site visits, particularly when they raise accounting policy–related issues during their visits. In cross‐sectional results consistent with expectations, we find that the role that fund manager public accounting experience plays is amplified when the firm suffers more severe agency problems, firm information asymmetry is worse, fund managers are more risk averse, fund managers have prior work experience at larger accounting firms, fund managers hold a larger proportion of the firm's shares, or there is coordination among mutual funds. Collectively, our evidence suggests that fund managers with public accounting experience impose stricter external monitoring on their portfolio firms' financial reporting choices.

In examining the loan contracting implications of SEC investigations, we document that banks charge higher loan spreads when borrowers are under investigation, with the rise in interest rates varying predictably with lender characteristics. Further, our evidence implies that the debt pricing impact of SEC investigations is amplified for borrowers suffering worse credit quality and information asymmetry as well as those relying more on bank loans. These findings suggest that banks perceive increased risk for borrowers under SEC scrutiny while also leveraging their knowledge of the investigations to extract rents. Supplemental analyses reveal tighter nonspread loan terms and a higher likelihood of amending existing loan contracts during SEC investigations. Additionally, the tightening of loan terms reverses for investigations that conclude without enforcement actions. Overall, our research identifies an economic cost of SEC investigations and alerts regulators to these costs when deciding whether to launch an investigation. Data Availability: All data used are available from the sources indicated in the paper.