Do REIT investors care? An investigation into the market response to the public release of SEC comment letter correspondences

ABSTRACT The Securities and Exchange Commission (SEC) in the US reviews REIT financial statements at least every three years. In these reviews, it adopts the perspective of an investor in evaluating the disclosure of REITs and asks questions an investor would ask. If any disclosure deficiencies are identified, the SEC sends a comment letter to the REIT requesting clarification, more discussion or corrections/improvements in future filings. We investigate the response of REIT investors to the public release of comment letter correspondences between the SEC and publicly traded equity REITs as well as the impact of different types of SEC comments on this response. Using a sample of 395 comment letter correspondences for annual reports (10-Ks) over the period of 2006 to 2019, we find a negative stock market response. Business-related SEC comments are most important in explaining the market response, but only for less transparent REITs. Our results suggest that SEC comment letters may improve the information environment for certain types of REITs by providing new information relevant to forecasting future cash flows and/or signalling information about a REIT’s reporting quality.