Regulatory Oversight of Financial Reporting: Securities and Exchange Commission Comment Letters

63 Pages Posted: 29 Oct 2008 Last revised: 9 Dec 2015

Rick Johnston

University of Alabama at Birmingham - Department of Accounting and Information Systems

Reining Petacchi

Georgetown University - Department of Accounting and Business Law

Date Written: October 29, 2015

Abstract

The Securities and Exchange Commission (SEC) reviews company filings (10Q, 10K, S1, etc.) submitted to them. If a review identifies potential deficiencies, the SEC staff sends the company a comment letter seeking clarification, additional information, and ultimately perhaps, revision of the filing or future filings. We examine the content, resolution, and ensuing informational consequences of SEC comment letters. The content analysis shows that nearly half of all comments involve accounting application, financial reporting, and disclosure issues. More than 17 percent of our sample cases result in immediate amended filings to resolve the issue(s) arising from the comment letters, and financial statements and/or footnotes are frequently revised. Following comment letter resolution, the adverse selection component of the bid-ask spread declines and Earnings Response Coefficients (ERCs) increase. Our results provide little support for the conjecture that the market interprets the receipt of a comment letter as a signal that the firm has poor reporting quality. Finally, we find no evidence that comment letter firms increase the quantity or change the type of voluntary disclosure, thereby eliminating a possible competing explanation for the improved information environment. We conclude the SEC’s oversight has beneficial informational effects.

Keywords: Securities and Exchange Commission (SEC), Comment Letter, Disclosure, Enforcement, Regulation

JEL Classification: G12, G14, G18, M48

Suggested Citation

Johnston, Rick and Petacchi, Reining, Regulatory Oversight of Financial Reporting: Securities and Exchange Commission Comment Letters (October 29, 2015). Available at SSRN: https://ssrn.com/abstract=1291345 or http://dx.doi.org/10.2139/ssrn.1291345

Rick M. Johnston (Contact Author)

University of Alabama at Birmingham - Department of Accounting and Information Systems ( email )

Birmingham, AL 35294
United States

Reining Petacchi

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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