SEC comment letters and firm disclosure

In an effort to enhance informational transparency for investors, the SEC periodically reviews public firms' filings for regulatory compliance. Although the SEC dedicates significant resources to the filing review process, the efficacy of this process is unclear. Upon receipt of a comment letter consequent to the SEC's review, the firm can either remedy perceived disclosure deficiencies or attempt to avoid making substantive disclosure changes, including by requesting that certain additional information be treated as confidential or by negotiating with the SEC. In this paper, we first examine the nature, extent, and impact of modifications to firms' disclosures requested by an SEC comment letter. While our initial evidence suggests that firms enhance their disclosure, we find that Rule 406 confidential treatment requests and registrant negotiation have an attenuating effect. Further, consistent with proprietary cost concerns, we show that firms in high tech industries and with greater amounts of R & D are more likely to request confidential treatment. We then examine informational transparency in order to test the SEC's stated intention of the filing review process. We find that improvements to firms' disclosures following a comment letter are associated with a decrease in information asymmetry and a reduction in litigation risk. Collectively, our paper contributes to the literature on disclosure regulation by providing evidence that the SEC comment letter process generally enhances firms' disclosures, improves informational transparency for investors, and mitigates firms' litigation risk, but that some firms take actions that diminish these enhancements.