Advertisement

Review of Accounting Studies

, Volume 23, Issue 4, pp 1355–1388 | Cite as

SEC monitoring of foreign firms’ disclosures in the presence of foreign regulators

  • James P. Naughton
  • Rafael Rogo
  • Jayanthi Sunder
  • Ray Zhang
Article
  • 224 Downloads

Abstract

SEC comment letters indicate that the SEC has reviewed the firm’s filings and identified a disclosure issue. Using the existence of an SEC comment letter as a proxy for SEC monitoring, we document a negative association between the level of SEC monitoring of foreign firms and the strength of those foreign firms’ home-country institutions, consistent with the idea that the SEC implicitly shares its regulatory duties with international securities regulators. We find that foreign cross-listed firms are subject to lower monitoring intensity than foreign firms listed only on US exchanges, but do not find a statistically significant difference in monitoring between foreign firms listed only on US exchanges and US firms. These findings suggest that it is the presence of another regulator that drives the intensity of SEC monitoring. We also find that US investor holdings are positively associated with the level of SEC oversight, suggesting that the SEC focuses its resources on firms that pose a greater risk to US investors. Collectively, our analyses show that two countervailing forces drive the SEC’s choice to monitor foreign firms. On the one hand, the SEC reduces monitoring intensity when it can rely on the public and private enforcement institutions in the foreign firm’s home country. On the other hand, the SEC provides increased monitoring of certain foreign firms when investors on US exchanges have greater investment exposure in those firms.

Keywords

Regulatory coordination Cross-list Bonding SEC Comment letters 

JEL codes

G15 G18 M41 

Notes

Acknowledgements

We appreciate helpful suggestions and comments from Patricia Dechow, Bret Johnson, Alistair Lawrence, Russell Lundholm, Sarah McVay, James Ryans, Lakshmanan Shivakumar, Roger Silvers, Aida Wahid, Clare Wang, Beverly Walther, Maria Wieczynska, Holly Yang, and workshop participants at Colorado Summer Accounting Research Conference, Conference on Financial Economics and Accounting, Journal of Accounting, Auditing and Finance Conference, UBCOW Conference, AAA Annual Meeting, University of California Berkeley, University of British Columbia, Arizona State University, University of Miami, and Burton Conference at Columbia University.

References

  1. Bens, D. A., Cheng, M., & Neamtiu, M. (2016). The impact of SEC disclosure monitoring on the uncertainty of fair value estimates. The Accounting Review, 91(2), 349–375.CrossRefGoogle Scholar
  2. Cassell, C., Dreher, L., & Myers, L. (2013). Reviewing the SEC’s review process: 10-K comment letters and the cost of remediation. The Accounting Review, 88(6), 1875–1908.CrossRefGoogle Scholar
  3. Christensen, H., Hail, L., & Leuz, C. (2016). Capital-market effects of securities regulation: prior conditions, implementation, and enforcement. Review of Financial Studies, 29, 2885–2924.CrossRefGoogle Scholar
  4. Cunningham, L., Johnson, B.A., Johnson, E.S., & Lisic, L.L. (2017). The switch up: An examination of changes in earnings management after receiving SEC comment letters. Working paper, University of Tennessee, George Mason University, and Virginia Polytechnic University.Google Scholar
  5. Dechow, P. M., Lawrence, A., & Ryans, J. (2016). SEC comment letters and insider sales. The Accounting Review, 91(2), 401–439.CrossRefGoogle Scholar
  6. Doidge, C., Karolyi, G. A., & Stulz, R. (2004). Why are foreign firms listed in the US worth more? Journal of Financial Economics, 71, 205–238.CrossRefGoogle Scholar
  7. Deloitte. (2013). SEC comment letters—including industry insights constructing clear disclosures. Available at: http://www.deloitte.com/assets/Dcom-UnitedStates/
  8. Hail, L., & Leuz, C. (2006). International differences in the cost of equity capital: Do legal institutions and securities regulation matter? Journal of Accounting Research, 44(3), 485–531.CrossRefGoogle Scholar
  9. Heese, J., Khan, M., & Ramanna, K. (2017). Is the SEC captured? Evidence from comment-letter reviews. Journal of Accounting and Economics, 64(1), 98–122.CrossRefGoogle Scholar
  10. Iliev, P., Miller, D., & Roth, L. (2014). Uninvited US investors? Economic consequences of involuntary cross-listing. Journal of Accounting Research, 52, 473–519.CrossRefGoogle Scholar
  11. Jackson, H., & Roe, M. (2009). Public and private enforcement of securities laws: Resource-based evidence. Journal of Financial Economics, 93, 207–238.CrossRefGoogle Scholar
  12. Johnston, R., & Petacchi, R. (2017). Regulatory monitoring of financial reporting: securities and exchange commission comment letters. Contemporary Accounting Research, 34(2), 1128–1155.CrossRefGoogle Scholar
  13. Kubick, T. R., Lynch, D. P., Mayberry, M. A., & Omer, T. C. (2016). The effects of regulatory scrutiny on tax avoidance: an examination of sec comment letters. The Accounting Review, 91(6), 1751–1780.CrossRefGoogle Scholar
  14. La Porta, R., López de Silanes, F., & Shleifer, A. (2006). What works in securities laws? Journal of Finance, 61, 1–32.CrossRefGoogle Scholar
  15. Lang, M., Raedy, J. S., & Wilson, W. (2006). Earnings management and cross listing: Are reconciled earnings comparable to US earnings? Journal of Accounting and Economics, 42(1), 255–283.CrossRefGoogle Scholar
  16. Piotroski, J. D., & Srinivasan, S. (2008). Regulation and bonding: The Sarbanes-Oxley Act and the flow of international listings. Journal of Accounting Research, 46, 383–425.CrossRefGoogle Scholar
  17. Ryans, J. (2018). Textual classification of SEC comment letters. Working Paper, London Business School.Google Scholar
  18. Securities and Exchange Commission (SEC). (2012a). Study on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of (p. 1934). Washington: D.C.Google Scholar
  19. Securities and Exchange Commission (SEC). (2012b). Study on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of 1934. Washington, D.C.Google Scholar
  20. Securities and Exchange Commission (SEC). (2013). Division of Corporation Finance: Filing Review Process. Available at: http://www.sec.gov/divisions/corpfin/cffilingreview.htm
  21. SEC Insight Inc. (2004). Response to “Proposal to Publicly Disclosure Staff Comment Letters and Non-Confidential Response Letters. Available at: http://www.sec.gov/news/press/s72804/secinsight093004.pdf
  22. Shnister, N. (2010). A free pass for foreign firms? An assessment of SEC and private enforcement against foreign issuers. Yale Law Journal, 119, 1638–1701.Google Scholar
  23. Siegel, J. (2005). Can foreign firms bond themselves effectively by renting US securities laws? Journal of Financial Economics, 75(2), 319–359.CrossRefGoogle Scholar
  24. Srinivasan, S., Wahid, A., & Yu, G. (2015). Admitting mistakes: Home country effect on the reliability of restatement reporting. The Accounting Review, 90(3), 1201–1240.CrossRefGoogle Scholar
  25. Tafara, E., & Peterson, R. J. (2007). A blueprint for cross-border access to US investors: A new international framework. Harvard International Law Journal, 48(1), 31–68.Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Kellogg School of ManagementNorthwestern UniversityEvanstonUSA
  2. 2.Kelley Business SchoolIndiana UniversityBloomingtonUSA
  3. 3.Eller College of ManagementUniversity of ArizonaTucsonUSA
  4. 4.Beedie School of BusinessSimon Fraser UniversityBurnabyCanada

Personalised recommendations