The Spillover Effect of SEC Comment Letters on Qualitative Corporate Disclosure: Evidence from the Risk Factor Disclosure

• In Event: SEC Comment Letters

Abstract

In this study we use the recently mandated risk factor disclosure to examine the spillover effect of SEC reviews of qualitative corporate disclosure. We find that firms that did not receive a comment letter on their risk disclosures (“No-letter Firms”) modify their subsequent year’s disclosures to a larger extent if the SEC has commented on the risk disclosure of (1) the industry leader, (2) a close rival, or (3) numerous industry peers and we refer to this effect as “spillover.” We find that after the SEC comments on the industry leader’s disclosure, No-letter Firms also provide more firm-specific disclosures in the subsequent year. The increased disclosure specificity reduces these firms’ likelihood of receiving SEC risk disclosure comments on the new filing. Overall, our findings suggest a deterrence benefit of SEC reviews of qualitative disclosure.

Authors

• Xiaoli Tian, The Ohio State University

• Jennifer Wu Tucker, University of Florida

• Stephen V Brown, Arizona State University