The Spillover Effect of SEC Comment Letters on Qualitative Corporate Disclosure: Evidence from the Risk Factor Disclosure

In this study we use the recently mandated risk factor disclosure to examine the spillover effect of SEC reviews of qualitative corporate disclosure. We find firms not receiving any comment letter (“No-letter Firms”) modify their subsequent year’s disclosure to a larger extent if the SEC has commented on the risk disclosure of (1) the industry leader, (2) a close rival, or (3) numerous industry peers. We refer to this effect as “spillover.” Further, we find that after the SEC comments on the industry leader’s disclosure, No-letter Firms also provide more firm-specific disclosure in the subsequent year. The increased disclosure specificity reduces these firms’ likelihood of receiving SEC risk disclosure comments on the new filings. Our evidence suggests that the SEC review of qualitative disclosure and release of comment letters have a learning benefit to companies and a deterrence benefit to regulators.