SEC Comment Letters and Bank Lending

Abstract

Banks collect private information for the purpose of monitoring borrowers. However, we have little evidence on the sources of private information they use. This study investigates whether and how banks use private information about regulatory oversight of public disclosures through the SEC comment letter process. Using within-sample and difference-in-differences analyses, we find that banks charge higher interest rates when borrowers receive a comment letter from the SEC, and such an increase in interest rate is greatest in the period when information regarding the comment letter is not yet publicly available. Further analyses show that the effect of comment letters on loan pricing is more pronounced when the letter identifies material disclosure deficiencies, issues subject to managerial discretion, and issues related to collateral valuation. Overall, our findings contribute to the literature on banks’ private information production by establishing the SEC comment letter process as a source of information banks use to make lending decisions.

Keywords: banks, comment letters, debt contracting, filing review process, SEC

JEL Classification: G21, G32, G38, M41