The readability of company responses to SEC comment letters and SEC 10-K filing review outcomes

Review of Accounting Studies (Forthcoming)

Posted: 19 Apr 2015 Last revised: 21 Jul 2019

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Lauren M. Cunningham

University of Tennessee - Haslam College of Business

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: February 2019

Abstract

An emerging literature shows that shareholders benefit from the Securities and Exchange Commission’s (SEC) filing reviews in terms of improved disclosures and reduced information asymmetry. However, these reviews also impose significant costs on companies because comment letter remediation diverts time and resources away from normal operations and may result in restated or amended filings. Applying processing fluency theory, we examine whether the readability of the company’s initial response to an SEC comment letter is associated with the likelihood of unfavorable outcomes from the review. We find that less readable company responses are associated with longer SEC response times and a greater likelihood that the company restates or amends a reviewed filing. Because the company response is preceded by a specific request for information from the SEC (i.e., a prompt), our setting allows for an improved ability to disentangle the effects of disclosure readability from the effects of disclosure content.

Keywords: amendments, readability, remediation costs, restatements, SEC comment letters

JEL Classification: M41, M48

Suggested Citation

Cassell, Cory A. and Cunningham, Lauren M. and Lisic, Ling Lei, The readability of company responses to SEC comment letters and SEC 10-K filing review outcomes (February 2019). Review of Accounting Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2595661 or http://dx.doi.org/10.2139/ssrn.2595661

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Lauren M. Cunningham

University of Tennessee - Haslam College of Business ( email )

Accounting and Information Management
603 Stokely Management Center
Knoxville, TN 37996
United States

Ling Lei Lisic (Contact Author)

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

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