Disclosure characteristics of firms being investigated by the SEC

Date01 October 2019
Published date01 October 2019
AuthorChristopher J. Demaline
Disclosure characteristics of firms being investigated by the SEC
Christopher J. Demaline
Business and CIS, Central Arizona College,
Apache Junction, Arizona
Christopher J. Demaline Professor, Business
and CIS Division, Central Arizona College,
805 S. Idaho Road, Apache Junction, AZ
Email: christopher.demaline@centralaz.edu
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
AAER, financial disclosure, impression management, readability, SEC enforcement, tone
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;30:1124. wileyonlinelibrary.com/journal/jcaf © 2019 Wiley Periodicals, Inc. 11

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