Comment Letters on Annual Reports: Evidence from an Emerging Market

This paper examines comment letters on firms’ annual reports in an emerging market. The literature primarily focuses on comment letters issued by the U.S. Securities and Exchange Commission (SEC), although many other market regulators also use SEC-style comment letters. Comment letters can potentially be very impactful in emerging markets due to weak institutions and low disclosure quality in these markets. Using comment letters in China from 2015 to 2019, I find that the market response to the receipt of comment letters is significantly negative and associated with the severity of the comment letters. The receipt (severity) of comment letters is associated with adverse regulatory consequences, CEO turnover, corrective actions to remedy financial reporting, and poor future financial performance in the propensity score matched sample (recipient sample). Overall disclosure quality in the post-review year does not increase, but some comment letter topics prompt topic-specific financial reporting changes.