How Does SEC Review Correspondence Affect Investors' Judgments? The Role of Access Costs and Review Ambiguity

Abstract

Review correspondence between the SEC and firms is a potentially valuable resource for investors, revealing important information about firms' financial reporting quality. Research suggests that reducing access costs (i.e., the amount of effort required to access review correspondence) could increase investors' processing of this important information. Drawing on psychology theory, I predict and find that access costs interact with another key characteristic within the SEC's control-review ambiguity (i.e., transparency about outcomes from the SEC's review process)-to influence investors' judgments. Results show that when access costs are low, greater review ambiguity decreases investors' reliance on review correspondence information and influences investment judgments in a corresponding manner. In contrast, review ambiguity has no effect on investors' reliance or investment judgments when access costs are high. Overall, my results provide important new insights on the importance of SEC transparency during its review process, particularly as information becomes more easily accessible.

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

“…The only nonarchival paper we are aware of is by Gale (2021), and it was published online after our paper collection cutoff of January 1, 2021. Gale (2021) leverages the experimental setting to examine what could potentially happen to management and investor decisions if the SEC were more transparent about its filing reviews (i.e., the SEC publishes whether a filing review did or did not occur). With rare exceptions (Duro et al 2019), prior literature relies on publicly available comment letter data to draw inferences about the filing review process.…”

Rational herding: evidence from equity crowdfunding

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