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Information Leakage Around SEC Comment Letters

Author

Listed:
  • Marshall A. Geiger

    (Robins School of Business, University of Richmond, Richmond, Virginia 23173)

  • Bret Johnson

    (School of Business, George Mason University, Fairfax, Virginia 22030)

  • Keith L. Jones

    (School of Business, University of Kansas, Lawrence, Kansas 66045)

  • Abdullah Kumas

    (Robins School of Business, University of Richmond, Richmond, Virginia 23173)

Abstract

We investigate whether sophisticated investors obtain information about Securities and Exchange Commission (SEC) comment letters before the public release date. Specifically, we examine mutual fund trading behavior around dates firms receive a comment letter. We find significant abnormal net selling by mutual funds immediately after a firm receives a comment letter. Additional tests find that abnormal net selling is greater when firms receive a second-round letter, where information leakage is more likely (e.g., firms with high board member connectedness and higher dedicated institutional ownership) and when comment letters address more critical issues (e.g., the need to restate prior results or related party transactions). We also find that funds with high abnormal net selling in the private phase avoid significant future share price declines. In sum, we find consistent evidence that mutual funds appear to trade on information obtained during the private phase of the SEC comment letter process.

Suggested Citation

  • Marshall A. Geiger & Bret Johnson & Keith L. Jones & Abdullah Kumas, 2022. "Information Leakage Around SEC Comment Letters," Management Science, INFORMS, vol. 68(11), pages 8449-8463, November.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:11:p:8449-8463
    DOI: 10.1287/mnsc.2021.4259
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    References listed on IDEAS

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