SEC Comment Letters and Bank Lending

The Sarbanes-Oxley Act of 2002 requires the Securities and Exchange Commission (SEC) to periodically review registrants’ filings. This study examines whether the SEC review process reveals information that is useful to stakeholders’ risk assessment decisions, beyond information available in other public filings. We use private debt contracting because there are delays in the public disclosure of SEC review correspondence, and because banks have access to private information about borrowers’ ongoing regulatory reviews or investigations. Using within sample and difference-in-differences analyses, and controlling for firm characteristics and other publicly available information at the time of the SEC review, we find that banks charge higher loan spreads to clients during and after an SEC review, and that the increase in loan spreads is higher when the review identifies material errors, issues subject to managerial discretion, and issues related to collateral valuation. These findings suggest that lenders find the information revealed during the SEC review process to be useful in debt contracting, beyond information available in 10-K and other public filings.