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

Brown, S. V., X. Tian, and J. W. Tucker. 2018. The Spillover Effect of SEC Comment Letters on Qualitative Corporate Disclosure: Evidence from the Risk Factor Disclosure. Contemporary Accounting Research. 35 (2): 622-656.

This paper examines how SEC comment letters to one company can lead to other companies modifying their own disclosures.
Cosine Similarity
NLP
Authors

Stephen V. Brown

Xiaoli Tian

Jennifer Wu Tucker

Published

June 1, 2018

Executive Summary

We find companies change their risk factor disclosures after other leaders and peers in the industry receive a comment letter from the SEC, even though the original company did not receive a letter itself. Not only does this spillover effect influence how much companies change their disclosures, but it also increases the amount of company-specific information they disclose and seems to improve overall disclosure quality. We develop our measure of company-specific disclosure by removing a large portion of industry-specific and general disclosure, leaving behind disclosure from that one firm.

Innovations

We are the first to show SEC comment letters can have a spillover effect to companies not even receiving such letters, and specifically show they improve overall disclosure quality from a regulatory standpoint. We are one of the first to perform natural language analysis of changes in risk factor disclosures. We also introduce a measure for quantifying company-specific disclosure (versus broad industry- or market-level general disclosures that do not reveal much about the individual company), which might be interpreted as a feature of higher quality disclosures.

Abstract

In this study we use the recently mandated risk factor disclosure to examine the spillover effect of the Securities and Exchange Commission (SEC) review of qualitative corporate disclosure. We find that firms not receiving any comment letter (‘No-letter Firms’) modify their subsequent year’s disclosures to a larger extent if the SEC has commented on the risk factor disclosure of (i) the industry leader, (ii) a close rival, or (iii) numerous industry peers. We refer to this effect as ‘spillover.’ Further, 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 their new filings. Our evidence suggests an indirect effect of the SEC review of qualitative disclosure.

Download

Citation

Brown, S. V., X. Tian, and J. W. Tucker. 2018. The Spillover Effect of SEC Comment Letters on Qualitative Corporate Disclosure: Evidence from the Risk Factor Disclosure. Contemporary Accounting Research. 35 (2): 622-656.

Back to top