When the SEC Speaks, Do Firms Listen? The Direct Impact of the SEC’s Comment Letter Process on Corporate Disclosure

• In Event: Disclosure Language

Abstract

Public companies are required to submit annual reports and other disclosure filings to the Securities and Exchange Commission (“SEC”). Periodically, the Division of Corporation Finance (“Corp Fin”) reviews these filings for regulatory compliance. The review may result in a comment letter requesting that the company amend a particular filing or that future filings be modified to remedy disclosure deficiencies. This comment letter process is advisory; only the SEC’s Division of Enforcement can take legal action to require changes. Because of concerns that the SEC has insufficient resources to follow up on its recommendations, the comment letter process may provide little incentive for companies to modify their filings in a meaningful way. In this paper, we directly test whether the SEC’s comment letter process prompts firms to make changes to their disclosures, consistent with the SEC’s desired intent of enhancing informational transparency for investors through its filing review process. Our evidence suggests that, upon receiving a comment letter from the SEC, firms modify their disclosures along several qualitative dimensions. We provide evidence that, in certain contexts, firms provide more disclosure—disclosure which is easier to read, less optimistic, more numeric, and more forward looking.

Authors

• Bret Adam Johnson, The Ohio State University

• Zahn Bozanic, The Ohio State University

• J Richard Dietrich, The Ohio State University