TCU Neeley Finance Professor dives deep into the U.S. Securities and Exchange Commission’s (SEC) disclosure obligations to examine financial reporting risks
November 30, 2021
By Neeley Analytics Initiative
The U.S. Securities and Exchange Commission (SEC), the chief watchdog of the Securities market, protects investors by ensuring timely disclosure of significant financial information.
To benefit the domestic investors with opportunities to diversify their holdings at potentially lower trading costs, the SEC reduced disclosure obligations for Foreign Portfolio Investments to encourage them to be listed in the United States.
With these relaxations, information disclosure and transparency, a crucial component for an orderly and fair market, seem to be compromised.
Audra Boone, the C. R. Williams Professor in Financial Services and team member of the Neeley Analytics Initiative (NAI), has ample expertise in corporate governance, mergers and acquisitions and disclosure. Boone’s research “Ongoing SEC Disclosures by Foreign Firms” was recently published in The Accounting Review.
Boone, along with her co-authors Kathryn Schumann-Foster at the SEC and Joshua T. White at Vanderbilt University, has researched how home-market reporting requirements and listing choices are associated with ongoing SEC disclosures by foreign firms and the investor response.
In recent years, the SEC has made several disclosure modifications to prevent duplicative disclosure burden for Foreign Private Issuers (FPIs). The SEC exempted FPIs from the periodic and ongoing reporting requirements (Forms 10-Q and 8-K). Instead, the 6-K reporting regime reflects the mandates of an FPI’s home market. The SEC also defers material event and interim financial disclosure obligations to foreign firms’ home-market regulator or exchange.
Their research explores how these changes are affecting the interest of FPIs and exposing U.S. investors to disclosure and financial reporting risks. For this, the researchers extracted a list of foreign firms from the SEC, EDGAR and WRDS SEC analytic suites. After cleaning up the data set, they finally came up with a sample of 1,135 foreign firms and 167,004 6-Ks for further processing.
“We find that the composition of FPIs reporting to the commission has changed in recent years, with a growing number of issuers stemming from home markets with weaker ongoing disclosure requirements,” Boone stated. “We also find a growing number of FPIs that list only in the U.S. and not in their home country, or any other foreign exchange," she added.
In the study, they found that PFIs that list only U.S. became more than double during 2003 to 2013 (15% to 35%). This distinction is important because without a home-market exchange, these issuers have little or no event-driven disclosure obligations due to their designation as FPIs.
These U.S.-only listed FPIs furnish substantially fewer ongoing 6-K disclosures to the commission than a matched sample of similar cross-listed FPIs and have considerable freedom over the information they supply to the commission and U.S. investors. However, contrary to rational belief, these firms experience greater investor interest and market response to each filing. The proxy for investor demand using search volume around each 6-K filing based on the SEC’s Electronic Data Gathering and Retrieval (EDGAR) weblogs. They document that upon a new 6-K filing there is a surge in EDGAR search volume and economically significant abnormal trading volume.
Boone and her co-authors also monitored the disclosure activity by the commission’s Division of Corporation Finance. “We find little evidence that the commission substitutes for lower information flow by U.S.-only listed issuers with additional monitoring via comment letters,” Boone stated.
