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Review of Accounting Studies

Erschienen in:

31.07.2019

The readability of company responses to SEC comment letters and SEC 10-K filing review outcomes

verfasst von: Cory A. Cassell, Lauren M. Cunningham, Ling Lei Lisic

Erschienen in: Review of Accounting Studies | Ausgabe 4/2019

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Abstract

An emerging literature shows that shareholders benefit from the Securities and Exchange Commission’s (SEC) filing reviews in terms of improved disclosures and reduced information asymmetry. However, these reviews also impose significant costs on companies because comment letter remediation diverts time and resources away from normal operations and may result in restated or amended filings. Applying processing fluency theory, we examine whether the readability of the company’s initial response to an SEC comment letter is associated with the likelihood of unfavorable outcomes from the review. We find that less readable company responses are associated with longer SEC response times and a greater likelihood that the company restates or amends a reviewed filing. Because the company response is preceded by a specific request for information from the SEC (i.e., a prompt), our setting allows for an improved ability to disentangle the effects of disclosure readability from the effects of disclosure content.

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We thank an anonymous reviewer for helping us to identify and articulate this advantage of our setting.

See the SEC’s Division of Corporation Finance’s Filing Review Process at https://www.sec.gov/divisions/corpfin/cffilingreview.htm.

For more information about the SEC’s dissemination of comment letter conversations, refer to the SEC’s press release 2004–89 (available at http://www.sec.gov/news/press/2004-89.htm).

Schwarz (2004) provides a similar argument.

Bog Index values for 10-K filings from 1994 to 2015 are available at https://kelley.iu.edu/bpm/activities/bogindex.html. 10-K Bog Index is unavailable for 696 observations from our final sample used for the Fog Index and Flesch Reading Ease Index.

See, for example, Walmart’s response to the SEC on July 9, 2013 (available at http://www.sec.gov/Archives/edgar/data/104169/000010416913000022/filename1.htm). Walmart first lists the SEC’s original comment and then provides a company response.

See https://www.sec.gov/Archives/edgar/data/1158863/000000000014048758/filename1.pdf.

See https://www.sec.gov/Archives/edgar/data/857737/000000000014056424/filename1.pdf.

We include controls for additional company characteristics in sensitivity analyses (see Section 4).

As stated on the SEC’s website: “The Division performs its primary review responsibilities through 11 offices staffed with approximately 80% of the Division’s employees. The members of these 11 offices have specialized industry, accounting, and disclosure expertise” (available at https://www.sec.gov/divisions/corpfin/cffilingreview.html).

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Titel: The readability of company responses to SEC comment letters and SEC 10-K filing review outcomes
verfasst von: Cory A. Cassell
Lauren M. Cunningham
Ling Lei Lisic
Publikationsdatum: 31.07.2019
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 4/2019
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-019-09507-x

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