An Investigation of the Effectiveness of the Division of Corporate Finance as a Monitor of Financial Reporting
Edmonds, Jennifer Echols
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This study uses the Securities and Exchange Commissionâ s (SEC) comment letters to investigate the SECâ s role as a monitor of financial reporting. I examine whether the SEC effectively comments on firms with poor disclosure quality. I utilize forward earnings response coefficients (FERC) as a measure of the marketâ s perception of disclosure quality. I expect comment letter firms to have lower disclosure quality and thus lower FERCs. Secondly, within the firms selected for comment, I investigate whether the Division allocates a greater amount of resources towards firms with more severe disclosure deficiencies. Results indicate that comment letter recipients have significantly lower forward earnings response coefficients than non- recipients. Results also document that comment letter recipients have lower contemporaneous earnings response coefficients than non-recipients. These findings are consistent with the DCF being effective in selecting firms that are perceived by the market as having low disclosure and earnings quality. However, within comment letter firms, I am unable to provide any evidence that the DCF allocates more resources to firms with lower forward earnings response coefficients.
- Doctoral Dissertations