The Impact of SEC Disclosure Monitoring on the Uncertainty of Fair Value Estimates

Posted: 4 Aug 2015 Last revised: 10 Aug 2015

See all articles by Daniel A. Bens

Daniel A. Bens

INSEAD

Mei Cheng

University of Arizona - Department of Accounting

Monica Neamtiu

City University of New York - Stan Ross Department of Accountancy

Date Written: August 10, 2015

Abstract

We investigate the role played by the Securities and Exchange Commission (SEC) in monitoring fair value disclosures in regulatory filings. Specifically, we assess whether SEC action via the issuance of fair value comment letters to registrants is followed by reductions in uncertainty about the firms’ fair value estimates. We hypothesize that registrants that receive a comment letter focusing on their fair value disclosure policies experience reductions in investor uncertainty regarding their fair value estimates in the post-letter period, compared to the pre-letter period. Supporting this prediction, we find that for the periods after the fair value comment letters, the associations between Level 2 and 3 fair value assets and our measures of uncertainty are significantly reduced. These findings are robust to a series of tests designed to ensure that we do not simply capture general changes in market uncertainty levels for firms investing in these types of assets. Our study contributes to the further understanding of market participants’ perception of fair value disclosures by investigating the role of SEC enforcement. This finding is important given recent criticisms of fair value reporting emanating from the highest levels of government and industry.

Keywords: fair value estimates, SEC enforcement, comment letters, information uncertainty

Suggested Citation

Bens, Daniel A. and Cheng, Mei and Neamtiu, Monica, The Impact of SEC Disclosure Monitoring on the Uncertainty of Fair Value Estimates (August 10, 2015). Accounting Review, Forthcoming; INSEAD Working Paper No. 2015/57/ACC. Available at SSRN: https://ssrn.com/abstract=2639505

Daniel A. Bens

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Mei Cheng

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Monica Neamtiu (Contact Author)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

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