Regulation and processing costs: Evidence from the hyperlink mandate

Abstract

Over the last few decades, the SEC has focused on improving the “usability” of financial filings. We examine the SEC’s 2017 hyperlink mandate to evaluate the effectiveness of one such initiative using the Blankespoor et al. (2020) processing cost framework. While the SEC expects links to external exhibits to help investors by reducing acquisition costs, research in other fields indicates the links may increase integration costs by increasing cognitive load. We find little evidence that the mandate affects the market response to 10-Ks, on average. However, post-mandate we observe muted market responses when investors are more constrained and stronger responses when investors benefit most from acquiring additional information. This evidence suggests that, although the mandate is not associated with net processing costs on average, there are predicable processing cost effects in certain circumstances. These findings have implications for academics as well as regulators as they evaluate future mandates.

Keywords: Disclosure processing costs, hyperlinks, SEC regulation, acquisition costs, integration costs

JEL Classification: G10, G14, M40, M41