Regulatory enforcement, foreignness, and language negativity: Evidence from SEC comment letters

In this paper, we demonstrate that negative language is employed as a mechanism through which regulators express their differentiated level of concern and pass on stronger messages to riskier reviewees. We investigate the language tone employed by the internationally-influential United States (US) Securities and Exchange Commission (SEC) in comment letters to foreign firms, which are considered riskier in comparison with their US domestic counterparts. We find a significantly greater level of language negativity in comment letters addressed to foreign registrants. We further show that the negativity of language is more intense when foreign firms are domiciled in strong-law countries and when they do not apply US Generally Accepted Accounting Principles (GAAP). We offer implications for regulators, managers, and market participants.