Regulator Continuity and Decision-Making Quality: Evidence from SEC Comment Letters

Abstract

Securities and Exchange Commission (SEC) staff review registrant filings for compliance with accounting and reporting standards to deter misconduct and facilitate investor access to high quality information (SEC 2020). Using a novel approach to identify all SEC staff who work on a review, we examine whether prior involvement (i.e., review team continuity) is associated with review quality. Although continuity may allow regulators to develop valuable firm-specific knowledge, our results are more consistent with continuity leading to lower quality reviews. Continuity is associated with shorter reviews with fewer substantive questions and agreed-upon disclosure changes. We find that review teams with greater continuity are more likely to focus on similar topics in consecutive reviews and that accountability can mitigate the negative effects of continuity on review quality. Overall, our results suggest benefits to a fresh perspective in monitoring.