In a paper titled "The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews," authors Miguel Euro, Jonas Hesse and Gaizka Ormazabal study the effects of the change in policy by the Securities and Exchange Commission (SEC) in 2004 to make comment letters publicly available. The disclosure of comment letters allows market participants to impose market discipline. Institutional investors in particular are attentive to comment letters, especially those related to financial reporting matters. The authors test their thesis by reviewing changes in financial reporting in the earnings periods following the publication of comment letters. The authors look at all comment letter reviews from 1998 to 2013. Following receipt of comment letters that are subsequently publicly disclosed, earnings reports are more informative (for example, contain longer narratives), more transparent and have a lower likelihood of restatements. Also, interestingly, when comment letters were available only by FOIA request, the effect of comment letters was less pronounced. This suggests that market discipline results from companies knowing that institutional investors will monitor comment letters and ask questions, and, as a result, companies improve the quality of their reports. In effect, market discipline reinforces the regulatory scrutiny. The authors also comment in passing on the fact that following the change in policy by the SEC the number of comment letters and number of comments declined. The authors attribute this to the adoption of the Sarbanes-Oxley Act at around the same time. However, it may be attributable in part to the fact that preparers of SEC reports may be better informed by reviewing publicly available comment letters and considering the applicability of such comments to the filings they are preparing. Access to the full paper can be found here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3178609
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