Comment Letters on Annual Reports: Evidence from an Emerging Market

Abstract

This paper examines the severity of comment letters on annual reports in an emerging market. The literature has exclusively focused on the U.S. Securities Exchange and Commission (SEC) comment letters, although many other market regulators also use SEC-style comment letters as a public enforcement tool. Comment letters can potentially have a bigger impact in emerging markets due to the poorer institutions and disclosure quality. Using comment letters in China from 2015 through 2019, I find that the severity of comment letters is associated with a wide range of capital-market, regulatory, managerial, and financial reporting future consequences. Specific financial reporting signals prompt comment topics relating to the signals, which in turn affect these financial reporting signals in the future but only when the topics are purely accounting-related. Replicating the tests with SEC comment letters yields generally weaker results despite a much bigger sample size.