Regulatory Transparency and Regulators’ Effort: Evidence from Public Release of the SEC's Review Work

Abstract

Using the public release of comment letters on EDGAR to capture a regime shift towards regulatory transparency, we examine whether an increase in transparency affects regulators’ effort and work performance. We find that the SEC staff reviews more filings and more documents per filing following the disclosure regime shift. These effects are incrementally stronger for firms with comment letters that are expected to attract greater investor or public monitoring. Furthermore, under the new regime, reviews are more timely. Upon the regime switch, the likelihood of a restatement (receiving a comment letter) decreases (increases) for filings that are reviewed. After receiving a comment letter, a firm with signs of potential fraud is more likely to be investigated, and this effect becomes more pronounced under the new regime. Altogether, our findings suggest that publicly disclosing regulators’ work output can mitigate moral hazard (i.e., increase regulators’ work input), improving their work performance.

Keywords: Regulatory Transparency, Work Effort, SEC Filing Review

JEL Classification: G00, G18, G38, M40, M41, M48