Comment Letter Frequency and CFO Turnover

Abstract

Earlier research on chief financial officer (CFO) turnover considered whether one of detailed regulatory findings, such as restatements, affected the likelihood of CFO turnover. However, since the passing of Sarbanes-Oxley Act (SOX), the Security Exchange Commission (SEC) has revised the regulatory approach it uses. It now investigates companies on a more frequent basis and using Comment Letters (CLs) regularly asks registrants to explain disclosure practice with a view to possibly requiring enhanced or revised disclosures. In this new proactive environment, some registrants may repeatedly receive CLs asking questions about multiple disclosure issues. This research uses a dynamic hazard model specification to investigate whether through time CFO turnover increases as the registrants accumulate more CLs. In addition to CL frequency, a measure of the severity of SEC CLs is introduced to see if it moderates the effect of frequency.

SEC Supervisory Activity in the Financial Industry

“…Dechow, Alastair, and Ryans (2016) find evidence of increased insider sales in the period between the first letter sent by the SEC and the date in which the conversation is published on the SEC website. Ryans (2016) shows that price response is larger and more rapid for Comment Letters that were known to have been read by investors, gathering evidence from the SEC EDGAR download logs, while Gietzmann, Marra, and Pettinicchio (2015), using a dynamic hazard model, demonstrate that Chief Financial Officer turnover increases as the registrants accumulate more Comment Letters. Bens, Cheng, and Neamtiu (2016) find that, after receiving a Comment Letter, the associations between Level 2 and Level 3 fair value assets and different measures of uncertainty are significantly reduced.…”

The SEC Filing Review Process: A Survey and Future Research Opportunities*

“…Findings on other changes following a comment letter are relatively limited, potentially because the receipt of a comment letter becomes, at best, a second‐ or third‐order effect on other types of changes. Prior literature finds some evidence of higher CEO turnover following comment letter‐related restatements, relative to other sources of restatements (Cheng et al 2014), higher audit fees (Gietzmann and Pettinicchio 2014; Rosati et al 2019), and a higher probability of CFO turnover (Gietzmann et al 2016). Evidence on the association between the receipt of a comment letter and executive compensation is mixed; Robinson et al (2011) find no significant association between the receipt of a compensation‐related comment letter and future compensation, but Chen et al (2020b) find specific circumstances in which a significant association exists between the receipt of comment letter and future compensation.…”

CHRO firm dinosaur versus CHRO role gorilla: the effect of CHRO company and role tenure on firms’ social performance

“…Garms and Engelen (2019) emphasize that "a major trend in firms' upper echelons has been to establish functional top management team (TMT) positions (CxOs) to manage critical firm outcomes centrally across business units". Extant studies investigate CFO succession (Geiger and North 2006;Gietzmann et al 2016;Mian 2001;Zorn 2004), the antecedents and performance consequences of Chief Marketing Officers (CMOs) (Germann et al 2015;Mahajan 2008, 2011), or the role of Chief Operating Officers (COOs) for firm performance (Hambrick and Cannella 2004;Marcel 2009). Other works analyze the interface between individual TMT members and the CEO (Heyden et al 2017;Jiang et al 2010;Shi et al 2018).…”