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
Date Written: October 1, 2019
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: Suggested Citation