Publication Type
Journal Article
Version
submittedVersion
Publication Date
4-2022
Abstract
We investigate regulatory actions in response to violations of mandatory derivatives disclosure rules (SFAS 161) and the outcomes of these regulatory interventions using a hand-collected sample of derivatives disclosures. Derivatives are used by nearly two-thirds of U.S. nonfinancial firms, and they are one of the most complex types of financial contracts. Consequently, inadequate derivatives disclosures could pose significant challenges to financial statement users in assessing the risk and financial health of enterprises. First, we document that firms with high proprietary and agency costs are less likely to comply with SFAS 161. Next, by examining derivatives-related SEC comment letters, we further show that this noncompliance significantly increases the likelihood of receiving a comment letter. We also find that comment letter resolution is longer for firms with strong proprietary motivations than for those with strong agency incentives. Finally, we find that compliance with regard to derivatives disclosures following comment letter resolution improves for firms with high agency costs but not for firms with high proprietary costs. Collectively, our results imply that, when derivatives-related proprietary costs are high, benefits of noncompliance likely outweigh the costs. Moreover, the SEC’s review effectiveness depends crucially on whether firms’ initial motivation for noncompliance is proprietary versus agency.
Keywords
Mandatory disclosures, Derivatives, Proprietary costs, Agency costs, SEC comment letters
Discipline
Accounting
Research Areas
Corporate Reporting and Disclosure
Publication
Review of Accounting Studies
Volume
28
First Page
2196
Last Page
2232
ISSN
1380-6653
Identifier
10.1007/s11142-022-09685-1
Publisher
Springer
Citation
BHATTACHARYA, Neil; CHANG, Hye Sun; and CHIOREAN, Raluca.
Regulatory interventions in response to noncompliance with mandatory derivatives disclosure rules. (2022). Review of Accounting Studies. 28, 2196-2232.
Available at: https://ink.library.smu.edu.sg/soa_research/1969
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1007/s11142-022-09685-1