The Role of External Regulators in Mergers and Acquisitions: Evidence from SEC Comment Letters

70 Pages Posted: 7 Oct 2019 Last revised: 20 Dec 2019

See all articles by Tingting Liu

Tingting Liu

Iowa State University

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Erin Towery

University of Georgia

Jasmine Wang

University of Georgia

Date Written: October 1, 2019

Abstract

This study examines the role of the Securities and Exchange Commission (SEC) in improving information transparency for mergers and acquisitions (M&As) involving publicly traded firms. Using hand-collected M&A comment letter data, we document that the SEC issues comment letters on M&A filings for 31 percent of the deals announced between 2005 and 2017. We find that the SEC is more likely to issue a comment letter when deal characteristics suggest greater risk to target firm shareholder welfare, target firms have weaker corporate governance, or target firms have weaker pre-transaction financial reporting quality. Further, we examine the real effects of SEC comment letters on deal outcomes and provide evidence that while the SEC comment letter process increases deal duration, it improves the likelihood of deal completion and increases the probability of positive deal price revision. We address concerns of endogeneity using entropy balancing, an Impact Threshold of a Confounding Variable (ITCV) analysis, and an instrumental variable approach. Overall, our paper suggests the SEC’s comment letter review process protects M&A shareholders by improving information transparency.

Keywords: Information transparency; M&A; SEC; Comment letters; Shareholder welfare; Corporate governance; Deal outcomes

JEL Classification: M41; G34; K22

Suggested Citation

Liu, Tingting and Shu, Tao and Towery, Erin and Wang, Jasmine, The Role of External Regulators in Mergers and Acquisitions: Evidence from SEC Comment Letters (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3464069 or http://dx.doi.org/10.2139/ssrn.3464069

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

Tao Shu

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

Erin Towery

University of Georgia ( email )

Terry College of Business
Athens, GA 30602-6254
United States

Jasmine Wang (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

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