Unexpected SEC Resource Constraints and Comment Letter Quality

We investigate whether reviews of transactional filings by the SEC unexpectedly constrain SEC resources leading to lower quality comment letters for periodic reports. The Sarbanes Oxley Act requires the SEC to review periodic reports (e.g., 10-Ks) at least once every three years. However, the SEC also reviews transactional filings (e.g., IPOs and acquisitions), which are unpredictable and often occur in waves. We find comment letters for periodic reports are of lower quality (in terms of outputs, inputs, and firm responses) during periods of abnormally high transactional filings. These results are robust to controlling for selection bias. We also find that comment letters issued during periods of abnormally high versus low transactional filings are associated with increased information asymmetry and lower earnings response coefficients in the quarter after the resolution of the comment letter. Overall, our results suggest that unexpected resource constraints affect the quality of SEC oversight of periodic reports.