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
Date Written: March 18, 2019
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: Suggested Citation