The effect of enforcement transparency: Evidence from SEC comment-letter reviews
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This paper studies the effect of the public disclosure of the Securities and Exchange Commission (SEC) comment-letter reviews (CLs) on firms’ financial reporting. We exploit a major change in the SEC’s disclosure policy: in 2004, the SEC decided to make its CLs publicly available. Using a novel dataset of CLs, we analyze the capital-market responses to firms’ quarterly earnings releases following CLs conducted before and after the policy change. We find that these responses increase significantly after the policy change. These stronger responses partly occur while the review is ongoing and persist on average for two years. Corroborating these results, we also document a set of changes that firms make to their accounting reports following CLs. Our results indicate that disclosure of regulatory oversight activities can strengthen public enforcement.
KeywordsDisclosure rules SEC comment-letter reviews Public enforcement
JEL classificationsG18 L51 M41 M45
We appreciate helpful comments from Patricia Dechow (the editor) and two anonymous reviewers. This paper has also benefited from the suggestions of Dan Amiram, Marc Badia, Terrence Blackburne, Zahn Bozanic, Pietro Bonetti, Fabrizio Ferri, Brandon Gipper, Jonathan Glover, Ian Gow, Trevor Harris, Colleen Honigsberg, Bob Herz, Bob Kaplan, Alon Kalay, Sharon Katz, Wayne Landsman (discussant), Tim Loughran (discussant), Christian Leuz, Stephen Penman, Oded Rozenbaum, Gil Sadka, Eugene Soltes, Ayung Tseng, Forester Wong, and workshop participants at Columbia Business School, Erasmus University in Rotterdam, European Securities and Markets Authority (ESMA), Harvard Business School IMO Conference, IESE Business School, Michigan State University, the 2018 Review of Accounting Studies Conference, University of Mannheim, University of Minnesota, the SEC’s Division of Economic and Risk Analysis (DERA), and WHU – Otto Beisheim School of Management. We also thank Olga Usvyatsky, vice president of research at Audit Analytics; Harvey Goldschmid, former SEC commissioner; Wayne Carnall, former chief accountant for the SEC’s Division of Corporation Finance; Brian Breheny, former SEC deputy director for legal and regulatory policy; and Steve Meisel, PwC’s partner and representative on the SEC Regulations Committee and the Center for Audit Quality Research Advisory Board. Miguel Duro acknowledges support from Columbia University CIBER, the Nasdaq Educational Foundation, and the Jerome Chazen Institute. Gaizka Ormazabal thanks the Marie Curie and Ramon y Cajal Fellowships and the Spanish Ministry of Science and Innovation, grant ECO2015-63711-P.
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