The power of words in capital markets: SEC comment letters on foreign issuers and the impact of home country enforcement

Chantziaras, A.; Koulikidou, K.; Leventis, S.

Abstract

In this paper, we examine the language tone of comment letters issued to foreign firms listed on US stock exchanges and the impact of home country enforcement. We find that the tone of US Securities and Exchange Commission (SEC) reviews has capital market implications following the dissemination of comment letters. Using a textual analysis methodology, we gauge SEC linguistic nuance by creating a customized wordlist for the US regulatory context. We evaluate alternative measures of tone and present evidence that our discipline-specific tone measure outperforms the frequently-cited dictionaries employed in analyses of corporate narratives. We document that negative-tone regulatory language, in contrast to positive, produces significant investor reactions. We further demonstrate that negative market reactions are amplified relative to the strength of home country enforcement environments. We offer important implications for enforcement agencies, companies, lenders and investors.

Citation

Chantziaras, A., Koulikidou, K., & Leventis, S. (2021). The power of words in capital markets: SEC comment letters on foreign issuers and the impact of home country enforcement. Journal of International Accounting, Auditing and Taxation, 42, Article 100359. https://doi.org/10.1016/j.intaccaudtax.2020.100359

• Journal Article Type: Article
• Acceptance Date: Mar 31, 2020
• Online Publication Date: Nov 25, 2020
• Publication Date: 2021-03
• Deposit Date: Apr 1, 2020
• Publicly Available Date: Nov 25, 2022
• Journal: Journal of International Accounting, Auditing and Taxation
• Print ISSN: 1061-9518
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 42
• Article Number: 100359
• DOI: https://doi.org/10.1016/j.intaccaudtax.2020.100359
• Public URL: https://durham-repository.worktribe.com/output/1305031