Noncompliance with SEC Regulations: Evidence from Timely Loan Disclosures
49 Pages Posted: 10 Jun 2020 Last revised: 15 Jul 2020
Date Written: May 15, 2020
We use required 8-K filings around major borrowings to shed light on firms’ choices of whether to comply with SEC disclosure rules. We first develop a simple model in which the firm weighs the benefit of obscuring the disclosure of an adverse event, against the cost of failing to comply with a rule that mandates disclosure. In the context of loan disclosures, the model predicts that the benefit of nondisclosure increases in the loan spread, and decreases in the ex ante probability of borrowing and in investors’ ability to infer the loan information from a subsequent 10-K or 10-Q. Consistent with the model, and exploiting within-firm variation, we find that firms are more likely to hide loans with high spreads. Firms are less likely to hide loans when investors anticipate borrowing during asset acquisition and when firms are followed by more equity analysts. Lastly, we provide evidence that the SEC does not rigorously enforce compliance with 8-K loan disclosures.
Keywords: Disclosure, Bank Loans, SEC Monitoring, Form 8-K
JEL Classification: G21, G28, G32, H25, H32
Suggested Citation: Suggested Citation