Being 'Invisible' by Being Transparent

Abstract

This paper examines the effects of SEC proximity on management earnings forecasts. We find that firms located closer to the SEC regional offices issue management earnings forecasts more frequently. Moreover, this relationship strengthens when firms’ peers experience SEC investigations and when firms are more strictly obligated to clarify previous misleading information. Our results suggest that firms use voluntary disclosures to mitigate SEC oversight due to geographic proximity. We further show that firms are likely to gain credibility by disclosing less upwardly biased forecasts and releasing bad news more frequently and in a timelier manner. Investors (analysts) are more likely to adjust their investments (forecasts) according to management earnings forecasts issued by firms located near the SEC offices. The SEC is less likely to issue comment letters to nearby firms that issue management earnings forecasts more frequently.

Keywords: proximity to SEC, SEC oversight, credibility, management earnings forecasts

JEL Classification: G14, G38, M41, M48