The effect of a risk Securities Exchange Commission comment letter on corporate disclosure and forecast accuracy: An exploratory analysis

Risk disclosure is an important issue discussed by the Securities Exchange Commission (SEC) in its review process. We evaluate the effect that a risk SEC comment letter can have on US registrants’ disclosure and the consequent information value generated. We examine whether disclosure changes in Item 1A and Form 10-K occur due to the SEC review and affect forecast accuracy. We manually examine risk SEC comment letters and Forms 10-K from 405 US listed companies. We employ a difference- in-difference (DID) design and a multi-level, mixed-effect generalised linear model to quantify the SEC’s effect. We estimate a 9,88 per cent disclosure volume increase of Item 1A and a decrease of 2,77 per cent of the Form 10-K. Following the letter, forecast error decreases by 1 per cent but this change is not induced by the disclosure volume changes, confirming that risk disclosure may be too generic and boilerplate to provide a sufficiently strong signal for financial analysts.