The SEC’s Use of Voluntary Disclosure for the Oversight of Mandatory Disclosure

One key challenge of regulatory oversight is information asymmetry between the regulator and the regulated. We investigate this issue through a unique setting in which the SEC uses firms’ voluntary disclosures to bridge the information gap during their periodic reviews of mandatory disclosures. We first document that over the sample period 2004-2019, reviewers increasingly quote information from conference calls in their comment letters on annual reports, requesting clarifications or future improvements (averaging over 5% during our sample period). We then develop a conceptual framework of key tradeoffs faced by the regulator to guide our empirical investigation of the determinants and consequences of such regulatory behavior. Consistent with our framework, we find that reviewers are more likely to cross-check conference call disclosures when a firm’s annual report disclosures suggest higher uncertainty or gloomy prospects, when a firm’s review process triggers concerns about potential disclosure issues, when a firm has high media coverage or more corporate events, when a firm has an eventful earnings season, or when reviewers themselves are not busy. Finally, we show that such regulatory behavior leads to some unintended consequences of firms reducing future conference call disclosures, which slows down price discovery during earnings announcements. Overall, our findings shed light on the inner workings of regulatory oversight, highlighting that referencing voluntary disclosures during regulatory scrutiny of mandatory disclosures may amplify firms’ concern about regulatory risks associated with voluntary disclosures and reduce future voluntary disclosures.