Being “Invisible” by Being Transparent

Abstract

We study the effects of SEC oversight, proxied by a firm’s geographic proximity to the nearest SEC regional office, on the firm’s management earnings forecasts. Using exogenous changes in proximity caused by SEC district office elevations to regional status, we find that firms located in closer proximity to SEC regional offices issue management earnings forecasts more frequently. We also show that this relationship strengthens when peer firms experience SEC investigations and are more strictly obligated to clarify previous misleading information. Our results suggest that firms use voluntary disclosures to mitigate SEC oversight. We show further that firms are likely to gain credibility by disclosing more pessimistic forecasts and releasing bad news more frequently and in a timelier way. Investors (analysts) are more likely to adjust their investments (forecasts) according to management earnings forecasts issued by firms that are located near SEC offices. As a result, the SEC is less likely to issue comment letters to nearby firms that issue management earnings forecasts more often.