DP12145 Does the Public Disclosure of the SEC's Oversight Actions Matter?

Author(s): Miguel Duro, Jonas Heese, Gaizka Ormazabal
Publication Date: July 2017
Keyword(s): Disclosure Rules, SEC comment letters, SEC oversight
JEL(s): M41
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12145

This paper studies the effect of the public disclosure of the Securities and Exchange Commission (SEC)'s oversight activity on firms' financial reporting. We exploit a major change in the SEC's disclosure policy: in 2004, the SEC decided to make its comment-letter reviews publicly available. Using a novel dataset of SEC comment letters (CLs), we analyze the capital-market responses to firms' quarterly earnings releases during SEC reviews conducted before and after the policy change. We find that these responses increase significantly following the policy change. Consistent with public disclosure of CLs increasing market discipline, we find that this relative increase is stronger among firms with higher percentages of dedicated institutional investors or independent directors. In contrast, we do not find conclusive evidence that public disclosure of CLs increases SEC oversight intensity. Corroborating these results, we also document a set of changes firms make to their accounting reports during these reviews. Our results indicate that the public disclosure of regulatory oversight activities can enhance the effect of these activities.