The Effect of SEC Reviewers on Comment Letters

Abstract

Prior research suggests that even for the same decision task there will be variation in decision outcomes across decision makers due to idiosyncrasies in their styles. This variation brings up a fundamental challenge in the realm of regulations where consistency is of great importance. This study examines whether the idiosyncrasy of individual employees of U.S. financial regulators contributes to inconsistent regulatory outcomes. Using a sample of SEC comment letters, we show that SEC reviewers’ idiosyncratic style plays a significant role in explaining the cross-sectional variation in filing review outcomes, even after holding firm and disclosure attributes constant. The reviewer style is persistent across firms and time. We also find that the likelihood of restatement during the review process and investor response to the release of comment letter information vary systemically with reviewer style. This finding suggests that SEC reviewers’ idiosyncratic style has implications for shareholders and the market, in addition to the costs imposed on registrant firms in resolving comment letter issues.

Keywords: SEC Reviewers, Reviewer Style, Comment Letters, Restatements

JEL Classification: M41, M48