Title: The Role of Public Disclosure in Regulatory Oversight
Description: This paper examines the benefits and costs of disclosing regulatory oversight actions. Specifically, I analyze the capital-market consequences of the SEC’s decision to make firm reviews publicly available. Typically, following a review of a public company, the SEC creates a “comment letter” describing its concerns about the company’s financials. Comment letters were previously available only to the company itself, but the SEC started publishing them in 2005. Using a unique database of comment letters issued before 2005, my research design exploits the staggered disclosure of comment letters to show that the letters affect information asymmetry differently in the pre- and post-periods. While the comment letters exacerbate information asymmetry around earnings releases when they are private, they decrease it when public. This effect is stronger when the reviews are more timely. I also show that comment letters increase the information content of the associated earnings releases only when they are public.

The effect is stronger for companies with higher levels of investor monitoring. However, I provide evidence that the SEC’s disclosure decision has enhanced managers’ ability to anticipate the content of the reviews, partially mitigating oversight efficacy. Despite this cost, my results suggest that the disclosure of SEC’s reviews helps to level the playing field among investors and improves the complementary oversight role played by the market.