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

The Review of Accounting Studies

61 Pages Posted: 25 May 2018 Last revised: 23 Mar 2019

See all articles by Miguel Duro

Miguel Duro

IESE Business School; European Corporate Governance Institute (ECGI)

Jonas Heese

Harvard University - Business School (HBS)

Gaizka Ormazabal

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: March 18, 2019

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. These stronger responses partly occur while the review is still ongoing and persist on average for two years. Corroborating these results, we also document a set of changes that firms make to their accounting reports following CLs. Our results indicate that disclosure of regulatory oversight activities can strengthen public enforcement.

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 (March 18, 2019). The Review of Accounting Studies, 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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jonas Heese

Harvard University - Business School (HBS) ( 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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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