Disclosure characteristics of firms being investigated by the SEC

• DOI: http://doi.org/10.1002/jcaf.22412
• Date: 01 October 2019
• Published date: 01 October 2019
• Author: Christopher J. Demaline

BLIND PEER REVIEW

Disclosure characteristics of firms being investigated by the SEC

Christopher J. Demaline

Business and CIS, Central Arizona College,

Apache Junction, Arizona

Correspondence

Christopher J. Demaline Professor, Business

and CIS Division, Central Arizona College,

805 S. Idaho Road, Apache Junction, AZ

85118.

Email: christopher.demaline@centralaz.edu

Abstract

The purpose of this study is to explore the characteristics of managers' 10-K disclo-

sures concerning U.S. Securities and Exchange Commission (SEC) investigations.

This study examined the quantitative linguistic characteristics of 171 company dis-

closures discussing the firms' involvement in an SEC investigation related to fraud-

ulent financial reporting. The results suggest that these disclosures have a relatively

negative sentiment and were relatively difficult to read. The results failed to pro-

vide sufficient statistical evidence to support the notion that managers systemati-

cally attempt to blame external parties for the potential wrongdoing and related

investigation. The study results add to the stream of research related to impression

management in corporate disclosures while also supplementing research on how

companies respond to negative events such as regulatory investigations. This study

may be of interest to financial regulators, investors, and accounting standards set-

ters, all of whom are interested in maximizing the usefulness of financial

information.

KEYWORDS

AAER, financial disclosure, impression management, readability, SEC enforcement, tone

1|INTRODUCTION

Capital markets are dependent upon financial information

(Healy & Palepu, 2001). Narrative disclosures add incre-

mental value to the financial numbers released by firms

(Bozanic & Thevenot, 2015). Information leads to more cer-

tainty of a company's future cash flow prospects (Johnstone,

2016). Management disclosures that readers can efficiently

and accurately decode reduce the information asymmetry

between the firm's management and external parties and

leads to more precise future earnings estimates. However,

managers may use a multitude of linguistic manipulation

measures to sway the opinion of the readers (Hemmings,

Brennan, & Merkl-Davies, 2017; Melloni, Stacchezzini, &

Lai, 2016); though, the empirical work leaves questions

about the specific nature and degree of impression manage-

ment (IM) used in financial disclosures.

IM theory has framed much of the previous research

exploring management's disclosure of negative events (bad

news). The quality of disclosure related to ongoing litigation

has been studied (Hennes, 2014), and regulatory disclosure

complexity (Cooper & Slack, 2015) has been considered.

The characteristics of the U.S. Securities and Exchange

Commission (SEC) accounting enforcement targets have

been explored in recent research (Beasley, Carcello,

Hermanson, & Neal, 2010; Cao, Leng, Feroz, & Davalos,

2013; Dechow, Hutton, Kim, & Sloan, 2012; Files, Sharp, &

Thompson, 2014; Karpoff, Lee, & Martin, 2017; Leng,

Feroz, Cao, & Davalos, 2011; Lo, Ramos, & Rogo, 2017;

Minhas & Hussain, 2016). However, there was a need for

further contributions to works covering existing theories of

financial disclosure by investigating managers' use of lin-

guistic features in their corporate communications (El-Haj,

Rayson, Walker, Young, & Simaki, 2019; Robinson &

Lokanan, 2017; Rutherford, 2018) and considering the spe-

cific topics being disclosed (Ajina, Laouiti, & Msolli, 2016;

Dyer, Lang, & Stice-Lawrence, 2016; Merkley, 2014).

Absent from the IM research was an exploration of

Received: 8 June 2019 Accepted: 1 August 2019

DOI: 10.1002/jcaf.22412

J Corp Acct Fin. 2019;30:11–24. wileyonlinelibrary.com/journal/jcaf © 2019 Wiley Periodicals, Inc. 11