Regulatory Interventions in Response to Non-Compliance with Mandatory Derivatives Disclosure Rules

53 Pages Posted: 28 Dec 2021

See all articles by Neil Bhattacharya

Neil Bhattacharya

Southern Methodist University (SMU) - Accounting Department

Hye Sun Chang

Singapore Management University - School of Accountancy

Raluca Chiorean

Lehigh University - Department of Accounting

Date Written: March 24, 2022

Abstract

We investigate regulatory actions in response to violations of mandatory derivatives disclosure rules (SFAS 161) and the outcomes of these regulatory interventions using a hand-collected sample of derivatives disclosures. Derivatives are used by nearly two-thirds of U.S. nonfinancial firms, and they are one of the most complex types of financial contracts. Consequently, inadequate derivatives disclosures could pose significant challenges to financial statement users in assessing the risk and financial health of enterprises. First, we document that firms with high proprietary and agency costs are less likely to comply with SFAS 161. Next, by examining derivatives-related SEC comment letters, we further show that this noncompliance significantly increases the likelihood of receiving a comment letter. We also find that comment letter resolution is longer for firms with strong proprietary motivations than for those with strong agency incentives. Finally, we find that compliance with regard to derivatives disclosures following comment letter resolution improves for firms with high agency costs but not for firms with high proprietary costs. Collectively, our results imply that, when derivatives-related proprietary costs are high, benefits of noncompliance likely outweigh the costs. Moreover, the SEC’s review effectiveness depends crucially on whether firms’ initial motivation for noncompliance is proprietary versus agency.

Keywords: Mandatory disclosures; derivatives; proprietary costs; agency costs; SEC comment letters

JEL Classification: G32; G38; M41

Suggested Citation

Bhattacharya, Neil and Chang, Hye Sun and Chiorean, Raluca, Regulatory Interventions in Response to Non-Compliance with Mandatory Derivatives Disclosure Rules (March 24, 2022). Review of Accounting Studies, Forthcoming, SMU Cox School of Business Research Paper No. 21-21, Singapore Management University School of Accountancy Research Paper No. 2022-145, Available at SSRN: https://ssrn.com/abstract=3979231 or http://dx.doi.org/10.2139/ssrn.3979231

Neil Bhattacharya (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

Hye Sun Chang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Raluca Chiorean

Lehigh University - Department of Accounting ( email )

United States

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