The Consequences of Writing Not So Readable Responses to SEC Comment Letters

Abstract

An emerging literature shows that shareholders benefit from the Securities and Exchange Commission’s (SEC) filing review process in terms of improved disclosures and reduced information asymmetry. However, SEC filing reviews also impose significant costs on companies because the comment letter remediation process diverts substantial time and resources away from normal operations and may result in restated or amended filings. Applying processing fluency theory, we examine whether the readability of the company’s initial response to an SEC comment letter affects the likelihood of unfavorable outcomes in the SEC review process. Specifically, using the Fog index, the Flesch Reading Ease Index, and the Kincaid Index to measure the readability of the company’s response, we predict and find that less readable company responses are associated with longer SEC response times and a higher likelihood that the company files a restatement or amendment as a result of the filing review. Our results should be of interest to managers, boards of directors, audit committees, and other stakeholders involved in formulating responses to SEC comments because they suggest that improving response readability is a relative easy and inexpensive way for companies to mitigate the costs of the comment letter remediation process.