SEC's Disclosure Rules Research Articles

Do the SEC's disclosure rules affect shareholder value?

Do the SEC's disclosure rules affect shareholder value?

Noncompliance with SEC regulations: evidence from timely loan disclosures

We use required 8-K filings around major borrowings to shed light on firms’ choices of whether to comply with SEC disclosure rules. Exploiting within-firm variation, we find that firms are more likely to hide loans with high spreads and tight financial covenants. We further find that firms appear to exploit the ambiguity of the definition of materiality, as they are more likely to selectively disclose (hide) “immaterial” loans when interest rates are low (high). Firms are less likely to hide loans when investors anticipate borrowing during asset acquisition, when firms are followed by more equity analysts or receive more investor attention, and when the firms’ stock prices are more volatile. Lastly, we provide evidence that the SEC does not rigorously enforce compliance with 8-K loan disclosures.

Required CEO stock ownership: Consequences for risk-taking and compensation

In response to corporate governance concerns, SEC disclosure rules, and pressure from Institutional Shareholder Services, most large U.S. public firms have adopted executive stock ownership requirements (‘SORs’) in recent years. Compared to CEOs already in compliance, CEOs who have not yet fulfilled the requirement at adoption subsequently increase stockholdings, exposing themselves to more company-specific risk, potentially providing risk-reduction incentives and diminishing their subjective valuation of firm equity. We find that these CEOs on average subsequently reduce firm risk through diversifying M&A, less financial leverage, and smaller R&D investment. They experience a deterioration in firm performance and valuation, each associated with firms that do reduce risk, but receive significantly increased stock grants. Our evidence suggests that boards should exercise judgment when adopting this popular governance initiative.

Noncompliance with SEC Regulations: Evidence from Timely Loan Disclosures

We use required 8-K filings around major borrowings to shed light on firms’ choices of whether to comply with SEC disclosure rules. Exploiting within-firm variation, we find that firms are more likely to hide loans with high spreads and tight financial covenants. We further find that firms appear to exploit the ambiguity of the definition of materiality as they are more likely to selectively disclose (hide) “immaterial” loans when interest rates are low (high). Firms are less likely to hide loans when investors anticipate borrowing during asset acquisition, when firms are followed by more equity analysts or receive more investor attention, and when the firms’ stock prices are more volatile. Lastly, we provide evidence that the SEC does not rigorously enforce compliance with 8-K loan disclosures.

The effects of the 2006 SEC executive compensation disclosure rules on managerial incentives

In 2006, the SEC amended the disclosure requirements for executive compensation and stock ownership. This paper examines the effects of these amendments on (1) the association between equity-based executive incentives and firm payout choice, and (2) the association between executive compensation and earnings management. We find that after the effective date of the SEC rules, the positive associations between executive stock option holdings and firm open-market repurchases, and between executive shareholdings and firm dividend payouts, have weakened. In addition, the positive associations between bonus and discretionary accruals, between bonus and real earnings management, and between equity compensation and real earnings management, have decreased. In general, these findings are consistent with the notion that the 2006 SEC disclosure rules lowered management's self-interested actions by mitigating the information asymmetry between investors and managers.

Letter From the Editor

Letter From the Editor

Boards, Auditors, Attorneys and Compliance with Mandatory SEC Disclosure Rules

We survey the empirical literature on the determinants of firms' compliance with mandatory SEC disclosure rules. We begin with a discussion of the role of boards of directors, public accounting firms, and corporate attorneys in the preparation and review of mandatory disclosures. We then organize current research into three broad types of variation in compliance: completeness, timeliness and readability. Our review highlights three interesting areas for future research: (1) studies that examine the relations between completeness, timeliness and readability within the same research design; (2) studies that assess whether boards of directors, public accounting firms and corporate attorneys view disclosure compliance as a general firm policy; and (3) studies that investigate the influence of corporate attorneys on mandatory disclosure, as well as studies of disclosure issues that require collaboration between auditors and corporate attorneys. As a first step to address the latter agenda, we provide new empirical evidence regarding the impact of corporate attorneys on disclosure compliance. Copyright © 2013 John Wiley & Sons, Ltd.

Recent Improvements in Corporate Governance through Executive Compensation Reform

There have been a lot of criticism on excessive executive compensation paid to high ranking corporate executives in poorly performed financial institutions amid recent financial crisis and global economic crisis. These criticisms can be tracked to Enron scandals in early stage of this century. In order to establish reasonable executive compensation system, U.S. has utilized SEC disclosure rules, IRS tax code and SOX clawback provision, however, these regulatory methods have revealed their inherent limitations in regulating compensation system effectively. From this perspective, many critics have stressed that there should be more fundamental reform methods, such as director reform and the adoption of Say-on-Pay system.In the same context, EESA and ARRA implemented corporate governance and executive compensation provisions in order to effectively regulated U.S. companies' compensation manipulation. The focus on this area is placed on the corporate governance reform in which corporate governance problems, including executive compensation, might be more effectively cured through this reform methods.Recent debates on this issue provide us with useful implications. As widely recognized, Korean compensation system does not mandate detailed compensation disclosure system regarding corporate executives/directors. Fair and transparent compensation system is essential elements in order to improve shareholders' and investors' value. Although corporate executives have rejected such a disclosure system on the ground of the protection of private information, we should note that these information be essential for investors as an important investment information.Furthermore, we should implement certain regulatory method to curtail influences by controlling shareholders and CEO on compensation setting process. Under the current provision of KCC, director compensation must be approved by shareholders in annual shareholder meeting. However, in practice, the direction of a shareholder meeting can be influenced by controlling shareholders. From this perspective, current reforming efforts of U.S. and Europena Countries provide us with useful implications.

Audit, Nonaudit, and Information Technology Fees: Some Empirical Evidence

This study examines the purchase of nonaudit services by SEC audit clients. Effective February 5, 2001, the SEC has required the disclosure and description of audit, nonaudit, and information technology fees paid to the incumbent auditor. The SEC enacted this rule due to concerns about auditor independence. Our study reviews these disclosed fees contained in the proxy statements of 2,795 firms since the effective date of the new SEC disclosure rules. The results indicate that the actual incidence and magnitude of nonaudit fees is much greater than the information relied upon during the SEC rule-making deliberations. Consequently, our study calls into question the data used during SEC rule-making process, as well as the clarity of the current audit and nonaudit service distinctions. Our results also suggest that the nonaudit service landscape has changed dramatically since the last period of publicly available fee data (1978–1981). Our results provide at least two public policy implications. First, the SEC should maintain, at a minimum, the current disclosure environment. Second, the SEC should strive to improve the clarity and granularity of the disclosures. Our results also indicate a clear need for additional research regarding the provision of nonaudit services.

Audit, Non-audit and Information Technology Fees: Some Empirical Evidence

This study examines the purchase of non-audit services by SEC audit clients. Effective February 5, 2001, the SEC has required the disclosure and description of audit, non-audit and information technology fees paid to the incumbent auditor. The SEC enacted this rule due to concerns over auditor independence. Our study reviews these disclosed fees contained in the proxy statements of 265 firms since the effective date of the new SEC disclosure rules. The results indicate that the actual incidence and magnitude of non-audit fees is much greater than the information relied upon during the SEC rulemaking deliberations. Consequently, our study calls into question the data used during SEC rule-making process, as well as the clarity of the current audit and non-audit service distinctions. Our results also suggest that the non-audit service landscape has changed dramatically since the last period of publicly available audit fee data (1978-1981). Finally, our results indicate a need for additional research regarding the provision of non-audit services.

Changes in SEC Disclosure Rules for Executive Stock Options: Implications for Valuation

Outstanding (unexercised and unexpired) executive stock options held by top managers of public corporations are an important indicator of accumulated compensation motivating their near-term behavior. In the process of radically overhauling disclosure requirements relating to executive compensation in the proxy rules in 1983, the SEC discontinued the requirement of disclosure of any particulars relating to outstanding executive stock options held by top managers. This has resulted in imprecisions in the measurement of key particulars of outstanding executive stock options of top managers since 1984. Although we have suggested some procedures for consistent valuation of these options over time, the SEC has since reintroduced the requirements regarding disclosure of unexercised and unexpired executive stock options in annual proxy statements, so that investors remain aware of the full extent of top managers' wealth.

Using and understanding the SEC's disclosure rules manual

AbstractThe Division of Corporation Finance of the Securities and Exchange Commission recently made available to the public its internal Accounting Disclosure Rules Manual which it uses for training and review. The manual contains interpretations and practices that are followed by the SEC staff in administering the disclosure requirements of the securities laws. The Manual does not, however, constitute rules or interpretations that have formally been approved by the Commission. The Manual references its provisions to SEC rules, regulations, and Staff Accounting Bulletins as well as to professional accounting and auditing pronouncements. In addition, it also includes a number of instances referred to as “staffpractice” that cannot be located elsewhere. In this article, some of these staff practices are set forth verbatim. Following the quotations are explanations as to why it was necessary for the staff to codify such previously unwritten rules.