Regulator Continuity and Decision-Making Quality: Evidence from SEC Comment Letters

Abstract

High quality financial information depends on the effectiveness of regulators charged with ensuring compliance with financial reporting regulation. We use the Securities and Exchange Commission (SEC) filing review process as a setting to test whether individual regulators’ prior involvement (i.e., review team continuity) is associated with the quality of their decision-making. Although continuity may allow regulators to develop valuable knowledge to improve their decision-making, our results are more consistent with continuity leading to lower-quality reviews. Specifically, we find that review team continuity is associated with shorter reviews that ask fewer questions related to authoritative guidance or materially deficient areas, are more similar to the prior review, and are less likely to elicit an acknowledgement that the firm will change their filings. Our inferences are robust to using SEC staff turnover as an instrument for continuity. Overall, our results suggest new team members may provide a fresh perspective.