The effect of SEC reviewers' local knowledge on comment letters

Abstract

This study examines whether the local knowledge of Securities and Exchange Commission (SEC) reviewers affect their comment letters. Using a sample of SEC comment letter conversations referencing company annual filings, I find the number of comment topics is positively affected by the local knowledge of each SEC reviewer of which alma mater is located closer to the reviewed firm. This positive association between the reviewers’ local knowledge and the number of comment topics is more pronounced when firm information is less distributed (e.g., small size firms or firms’ headquarters located in small population areas). I also find that specific comment issue categories (e.g., Emerging Issues Task Force GAAP, Legal Matters, Regulation S-X, Risk factors, Staff Accounting Bulletins, and Statement of Position AICPA) are significantly affected by the local knowledge of SEC reviewers. These results are largely attributable to individual SEC reviewers’ local information advantage and familiarity with respect to the reviewed firm. The findings of this study suggest individual SEC reviewers’ local knowledge arising from geographic proximity between their alma maters and reviewed firms’ headquarters help to find more number of disclosure deficiencies and significantly increase the number of comment topics.