Regulator Continuity and Decision-Making Quality: Evidence from SEC Comment Letters

Abstract

Staff at the U.S. Securities and Exchange Commission (SEC) conduct recurring reviews of firms’ filings to deter misconduct and facilitate investor access to high-quality information. We identify the names of SEC staff who work on a comment letter and examine whether their prior involvement (i.e., continuity) is associated with comment letter quality. Our results are consistent with continuity leading to lower quality comment letters. Continuity is associated with fewer substantive comments, agreed-upon disclosure changes, and greater similarity between consecutive comment letter reviews. These results are consistent with continuity increasing staffs’ tendency to focus on familiar issues and overlook other areas of potential deficiencies. Time, changes in firms’ operations, and increasing staffs’ feelings of accountability can mitigate the negative effect of continuity on comment letter quality. Our study suggests benefits to a fresh perspective in regulatory monitoring.

Regulatory Oversight and Reporting Quality: Evidence from SEC Office Assignment Change

“…Firms know in advance which office will review their firm's filing and if they will be assigned to a new office. This is different from Kubic and Toynbee (2021), where the firms do not know ex ante the name of staffs that will review their filings. If the change of SEC oversight is anticipated by firms in the year of office change, firms will change their reporting behavior accordingly based on their expectations even before their filings are reviewed by the new office.…”

“…However, recent work by Gipper et al (2021) use PCAOB data and find no evidence for audit quality declines over the tenure cycle and little support for fresh-look benefits after mandatory partner rotations. In SEC regulatory setting, Kubic and Toynbee (2021) find that reviewers' continuity leads to lower comment letter quality. Among these studies, the main argument for rotation is fresh-look benefits.…”

“…Prior studies also use comment letter characteristics (e.g. length, the number of topics, firm responses, error detection rate) to measure comment letter quality (Cassell et al 2013;Ege et al 2020;Gunny and Hermis 2020;Kubic 2021;Kubic and Toynbee 2021). However, I choose not to use these characteristics to measure SEC oversight, because these measures are correlated to firms' reporting and disclosure behavior, which is likely affected by office change.…”

“…Prior literature often use number of topics discussed in comment letter to measure comment letter review quality (Cassell et al 2013;Ege et al 2020;Gunny and Hermis 2020;Kubic and Toynbee 2021). However, the number of topics is also affected by the underlying reporting and disclosure quality of firms' filings.…”

“…The new office that comes in after office change can take a "fresh look" (Kubic and Toynbee 2021) and may allocate more attention and resources to newly assigned firms. Besides, the stated goals of office change by the SEC are to have a better fit between industries and offices and to balance the workload between different offices.…”