The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews
61 Pages Posted: 25 May 2018
Date Written: April 26, 2018
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: Suggested Citation