The effect of enforcement transparency: Evidence from SEC comment-letter reviews
- 15 Downloads
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.
- Becker, D., Jin, G. Z., & Leslie, P. (2012). Inspection design and inspector behavior. Working paper.Google Scholar
- Blackburne, T. (2014). Regulatory oversight and reporting incentives: evidence from SEC budget allocations. Working paper.Google Scholar
- Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. The Accounting Review, 73, 305–333.Google Scholar
- Coffee, J. C. (1984). Market failure and the economic case for a mandatory disclosure system. Virginia Law Review, 717–753.Google Scholar
- Coffee, J. C. (2007). Law and the market: the impact of enforcement. University of Pennsylvania Law Review, 156, 229–311.Google Scholar
- Cunningham, L. M., 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.Google Scholar
- ESMA. (2017). Peer review on guidelines on enforcement of financial information. July 18, 2017. Available at: https://www.esma.europa.eu/sites/default/files/library/esma42-111-4138_peer_review_report.pdf.
- Foster, G. (1977). Quarterly accounting data: time-series properties and predictive-ability results. The Accounting Review, 52, 1–21.Google Scholar
- Gipper, B., Leuz, C., & Maffett, M. G. (2017). Public audit oversight and reporting credibility: evidence from the PCAOB inspection regime. Working paper.Google Scholar
- Heese, J. (2019). The political influence of voters’ interests on SEC enforcement. Contemporary Accounting Research forthcoming.Google Scholar
- Katz, J. (2010). Reviewing the SEC, reinvigorating the SEC. University of Pittsburgh Law Review, 71, 489–516.Google Scholar
- Katz, J. (2011). U.S. Securities and Exchange Commission: A roadmap for transformational reform. Center for Capital Markets Competitiveness, U.S. Chamber of Commerce.Google Scholar
- Leuz, C., & Schrand, C. M. (2009). Disclosure and the cost of capital: evidence from firms’ response to the Enron shock. Working paper.Google Scholar
- Lewis, C. (2012). Risk modeling at the SEC: The Accounting Quality Model. Speech delivered at the Financial Executives International Committee on Finance and Information Technology, December 13. Available at https://www.sec.gov/news/speech/2012-spch121312cmlhtm.
- Paredes, T. (2009). Remarks before the symposium on the past, present, and future of the SEC. http://www.sec.gov/news/speech/2009/spch101609tap.htm (accessed 04.13.17).
- PwC. (2014). Stay informed: 2014 SEC comment letter trends. http://pwchealth.com/cgi-local/hregister.cgi/reg/pwc-sec-comment-letter-trends-nov-2014.pdf (accessed 04.18.17).
- PwC. (2016a). Stay informed: 2016 SEC comment letter trends. https://www.pwc.com/us/en/cfodirect/assets/pdf/sec-comment-letter-trends/financial-services-2016.pdf (accessed 06.16.17).
- PwC. (2016b). SEC comment letter response process. https://www.pwc.com/us/en/cfodirect/multimedia/videos/sec-comment-letter-response-process.html (accessed 10.03.17).
- Steinberg, M. I. (2009). Securities regulation. Revised (fifth ed.). New Providence: LexisNexis Group.Google Scholar
- Teoh, S. H., & Wong, T. J. (1993). Perceived auditor quality and the earnings response coefficient. The Accounting Review, 68, 346–366.Google Scholar
- U.S. SEC. (2004). SEC staff to publicly release comment letter and responses. SEC Press Release No., 04–89.Google Scholar
- U.S. SEC. (2010). Strategic plan: Fiscal years 2010–2015. https://www.sec.gov/about/secstratplan1015f.pdf (accessed 11.07.17).
- U.S. SEC. (2011). SEC staff to release filing review correspondence earlier. https://www.sec.gov/divisions/corpfin/cfannouncements/edgarcorrespondence.htm (accessed 04.18.17).
- U.S. SEC. (2015). Division of corporation finance - Filing review process. https://www.sec.gov/divisions/corpfin/cffilingreview.htm#.VQBzofl4q-1 (accessed 04.18.17).
- U.S. SEC. (2002–2012). Annual report — performance and accountability report.Google Scholar
- U.S. SEC. Office of Inspector General (OIG). (2000). Review of periodic reports. Memorandum Report No. 298.Google Scholar
- U.S. SEC. Office of Inspector General (OIG). (2007). Backlog of FOIA requests for comment letters. Memorandum Report No. 422.Google Scholar
- U.S. SEC. (2008). Final Report of the Advisory Committee on Improvements to Financial Reporting (CIFiR). Available at: http://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf
- U.S. SEC. Office of Inspector General (OIG). (2008a). Inspection of corporation finance referrals. Report No. 433. https://www.sec.gov/about/oig/audit/2008/433final.pdf (accessed 04.18.17).
- U.S. SEC. Office of Inspector General (OIG). (2008b). SEC’s oversight of Bear Stearns and related entities. Report No. 446-A.Google Scholar