The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews

61 Pages Posted: 25 May 2018

See all articles by Miguel Duro

Miguel Duro

IESE Business School

Jonas Heese

Harvard Business School

Gaizka Ormazabal

University of Navarra, IESE Business School

Date Written: April 26, 2018

Abstract

This paper studies the effect of the public disclosure of the Securities and Exchange Commission (SEC) comment-letter reviews (CLs) on firms’ financial reporting. We exploit a major change in the SEC’s disclosure policy: in 2004, the SEC decided to make its CLs publicly available. Using a novel dataset of CLs, we analyze the capital-market responses to firms’ quarterly earnings releases following CLs conducted before and after the policy change. We find that these responses increase significantly after the policy change. Consistent with CL disclosure increasing market discipline, we find that this increase is stronger among firms with a higher proportion of dedicated institutional investors or more substantive CLs. Corroborating these results, we also document a set of changes that firms make to their accounting reports following CLs. In contrast, we do not find conclusive evidence that CL disclosure increases SEC oversight intensity. Our results indicate that the disclosure of regulatory oversight activities can complement public enforcement with market monitoring.

Keywords: Disclosure Rules, SEC Comment-Letter Reviews, Public Enforcement

JEL Classification: G18, L51, M41, M45

Suggested Citation

Duro, Miguel and Heese, Jonas and Ormazabal, Gaizka, The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews (April 26, 2018). Available at SSRN: https://ssrn.com/abstract=3178609 or http://dx.doi.org/10.2139/ssrn.3178609

Miguel Duro

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Jonas Heese

Harvard Business School ( email )

Soldiers Field Road
Morgan Hall 397
Boston, MA 02163
United States

Gaizka Ormazabal (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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