The Power of Words in Capital Markets: SEC Comment Letters on Foreign Issuers and the Impact of Domestic Enforcement

68 Pages Posted: 27 Jun 2018  

Daniel Giamouridis

Bank of America - Bank of America Merrill Lynch; Athens University of Economics and Business; City University London - Cass Business School - Faculty of Finance; EDHEC Risk Institute

Kleopatra Koulikidou

International Hellenic University - School of Economics and Business Administration; International Hellenic University (IHU)

Stergios Leventis

International Hellenic University - School of Economics and Business Administration; International Hellenic University (IHU)

Date Written: May 20, 2018

Abstract

In this paper, we examine the language tone of comment letters issued to foreign firms listed on US stock exchanges and the impact of domestic enforcement. We find that the tone of SEC reviews has capital market implications following the dissemination of comment letters. Using a textual analysis methodology, we gauge SEC linguistic nuance by creating a customized wordlist for the US regulatory context. We evaluate alternative measures of tone and present evidence that our discipline-specific tone measure outperforms the frequently-cited dictionaries employed in analyses of corporate narratives. We document that negative-tone regulatory language, in contrast to positive, produces significant investor reactions. We further demonstrate that negative market reactions are amplified relative to the strength of domestic enforcement environments. Finally, we find that negative-tone measures generate the same directional capital effect on both US GAAP and non-US GAAP filers; however, when we consider only the important comment letters, the market reaction is more negative for foreign firms which apply the US GAAP. We offer important implications for enforcement agencies, companies, lenders and investors.

Keywords: Enforcement, SEC Comment Letters, Textual Analysis, Tone, Investor Reaction

JEL Classification: M48, K42, G14

Suggested Citation

Giamouridis, Daniel and Koulikidou, Kleopatra and Leventis, Stergios, The Power of Words in Capital Markets: SEC Comment Letters on Foreign Issuers and the Impact of Domestic Enforcement (May 20, 2018). Available at SSRN: https://ssrn.com/abstract=3200306 or http://dx.doi.org/10.2139/ssrn.3200306

Daniel Giamouridis

Bank of America - Bank of America Merrill Lynch ( email )

United Kingdom

Athens University of Economics and Business ( email )

Department of Accounting and Finance
Greece

City University London - Cass Business School - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

EDHEC Risk Institute ( email )

Lille
France

Kleopatra Koulikidou (Contact Author)

International Hellenic University - School of Economics and Business Administration; International Hellenic University (IHU) ( email )

14th km Thessaloniki
Moudania
Thermi, Thessaloniki 57001
Greece
+30 231 080-7575 (Phone)

Stergios Leventis

International Hellenic University - School of Economics and Business Administration ( email )

14th km Thessaloniki
Moudania
Thermi, Thessaloniki 57001
Greece

International Hellenic University (IHU) ( email )

14th km Thessaloniki
Moudania
Thermi, Thessaloniki 57001
Greece

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