The effect of a risk Securities Exchange Commission comment letter on corporate disclosure and forecast accuracy: An exploratory analysis

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Abstract

Risk disclosure is an important issue discussed by the Securities Exchange Commission (SEC) in its review process. We evaluate the effect that a risk SEC comment letter can have on US registrants’ disclosure and the consequent information value generated. We examine whether disclosure changes in Item 1A and Form 10-K occur due to the SEC review and affect forecast accuracy. We manually examine risk SEC comment letters and Forms 10-K from 405 US listed companies. We employ a difference-in-difference (DID) design and a multi-level, mixed-effect generalised linear model to quantify the SEC’s effect. We estimate a 9,88 per cent disclosure volume increase of Item 1A and a decrease of 2,77 per cent of the Form 10-K. Following the letter, forecast error decreases by 1 per cent but this change is not induced by the disclosure volume changes, confirming that risk disclosure may be too generic and boilerplate to provide a sufficiently strong signal for financial analysts.

Keywords: SEC Comment Letter, Corporate Disclosure, Form 10-K, Item 1A, Information Asymmetry, Enforcement, SEC Review, Forecast Accuracy

Authors’ individual contribution: Conceptualization — M.P. and A.L.M.; Methodology — M.P., P.R., and P.C.; Formal Analysis — M.P., P.R., and P.C.; Data Curation — M.P. and P.R.; Writing — Original Draft — M.P., P.R., and P.C.; Writing — Review & Editing — M.P., P.R., and P.C.; Supervision — A.L.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G14, K22, M41

Received: 23.07.2024
Accepted: 08.10.2024
Published online: 10.10.2024

How to cite this paper: Papa, M., Rossi, P., Candio, P., & Muserra, A. L. (2024). The effect of a risk Securities Exchange Commission comment letter on corporate disclosure and forecast accuracy: An exploratory analysis [Special issue]. Corporate Ownership & Control, 21(3), 93–108. https://doi.org/10.22495/cocv21i3siart8