Earnings conference calls are an important way for firms to communicate with external stakeholders. Equity shareholders, buy-side and sell-side analysts, debtholders, and other capital market participants view the calls as informative beyond the contemporaneous earnings announcements. Yet, little is known about how useful call information is to regulators.
The Securities and Exchange Commission (SEC) periodically reviews the filings of all public companies to ensure that investors have access to high-quality disclosures (SEC 2019a). During the filing review process, the SEC will issue comment letters to firms whose disclosures are inconsistent with applicable SEC reporting requirements or “materially deficient in explanation or clarity” (SEC 2019b). Academic literature on SEC comment letters typically assumes that the regulator only examines the information in mandatory filings – annual and quarterly reports, current reports, proxy filings, etc. However, we do not know whether the SEC staff also considers other publicly available information when conducting reviews. In a new study, we provide evidence that the SEC reviews information in earnings conference calls, and these voluntary disclosures affect the process and outcomes of regulatory scrutiny.
We examine all SEC comment letters referencing a firm’s earnings conference call(s). Our sample includes over 800 letters from 2005 to 2018, representing slightly over 1 percent of all comment letter conversations available from Audit Analytics. More than two-thirds of the sample are 10-K comment letters, and another 18 percent pertain to 10-Qs. Thus, conference call disclosures primarily serve as a reference point during SEC reviews of periodic reports. To better understand how the SEC uses the call information, we manually categorize the comments based on how the SEC incorporates the disclosed details from the call into their review. Importantly, federal securities laws do not require firms to hold earnings conference calls. As a result, neither the disclosure of specific information during a conference call nor the structure of that information is subject to SEC scrutiny beyond compliance with Regulation Fair Disclosure (SEC 2018). Correspondingly, we observe that approximately 80 percent of the sample are cases where the SEC refers to information disclosed in a conference call to support the claim that the firm’s disclosures in its periodic report(s) are insufficient. The second-largest group comprises 15 percent of the sample and includes comment letters emphasizing that a specific disclosure in the reviewed filing is inconsistent with the facts disclosed or the extent or format of the disclosure in the conference call. Except for non-GAAP or key performance indicators (KPI) comments, very few letters suggest that a specific disclosure in a conference call is a problem.
Our manual examination of the conference call comment letters allows us to provide other descriptive details about the subject and format of conference call disclosures targeted by the SEC. The three most frequent topics addressed are revenues, segment reporting, and non-GAAP/KPIs. Together, these three issues account for 45 percent of our sample. Management Discussion and Analysis (MD&A) disclosures related to risk factors, products, customers, markets, or seasonality are also common, representing 23 percent of the sample. Overall, we document a broad scope of issues addressed, suggesting that the SEC finds firms’ conference call disclosures useful in many aspects of the review process. We observe that the SEC refers to information disclosed both during the management presentation and the question-and-answer portion of the calls. While half of the comments refer to the conference call from the same fiscal quarter as the filing under review, the SEC also references conference call disclosures from earlier periods and even from calls that occur after the filing being reviewed.
We explore the factors that affect a company’s likelihood of receiving a comment letter referencing a call. Most academic literature investigates the determinants of a firm’s probability of receiving any comment letter versus no comment letter. Our analysis sheds a different light on the regulatory review process in identifying the factors that predict the SEC’s reliance on this voluntary, unregulated, but value-relevant disclosure. We find a higher frequency of conference call comment letters when the calls are more likely to be informative (i.e., firms with more institutional investors and greater analyst following). The SEC staff is also more likely to expand its work to include conference call disclosures for more complex filing reviews. Consistent with resource constraints, conference call references are less frequent when the SEC staff is busy but are more likely when the SEC review team is larger and contains more accountants. Interestingly, most firm characteristics associated with greater overall SEC scrutiny and higher firm visibility are not strong drivers of SEC attention to conference calls (except for firms with higher market-to-book ratios and those with greater stock price volatility).
Next, we examine the remediation costs of conference call comment letters compared with comment letters that do not reference them. Call-referencing letters tend to be more costly to resolve, as evidenced by more issues in the comment letter conversation, more days between the SEC’s first comment letter and their “no further comment” letter, and more back-and-forth between the firm and the SEC before resolution. We further explore whether this greater cost is coupled with a more effective review process. Because conference calls focus on issues important to investors, reviewing calls could help SEC staff become more attuned to investor interests, thereby leading to more insightful and useful comment letters. Consistent with this prediction, we find call letters to be associated with a higher-quality review process as captured by more citations of authoritative guidance, lengthier firm responses, and more instances of firms agreeing to change their future disclosures.
Our final analyses consider whether these higher-quality comment letters result in meaningful changes to the amount or quality of information disclosed. We first consider firms’ future mandatory 10-K and 10-Q filings and find that filing length and size increase, the tone becomes more negative, and the frequency of both constraining and uncertain words increases. These changes are consistent with firms making more disclosures, particularly those highlighting risks and uncertainties, which could be useful for investors. However, firms could also change other aspects of their disclosure after realizing that the SEC is paying attention to voluntary conference calls. Interestingly, after receiving a comment letter referencing an earnings call, a firm’s overall bid-ask spreads and illiquidity increase, suggesting that these regulatory actions have a complex impact on the overall information environment.
The study adds to our understanding of financial regulation by examining how the information disclosed in unregulated, voluntary conference calls plays a role in the SEC’s filing-review process. Examining voluntary disclosure may enable regulators to better perform their gatekeeping duties with respect to mandatory reporting but at the cost of expended resources and uncertain effects on the information disclosed. Moreover, firms incur substantial costs in the remediation process when responding to SEC comment letters, including internal staff diverted from normal activities and resources spent on higher audit and legal fees. If regulators’ reliance on voluntary disclosure leads to greater remediation costs, it could translate into better future reporting by firms, or it may have a chilling effect on firms’ willingness to disclose. Our findings about how conference calls affect the SEC review process should interest regulators, managers, and stakeholders affected by compliance costs and disclosure choices. It also invites future research on whether and how other parties, such as lenders, credit rating agencies, tax authorities, or the Department of Justice antitrust staff find conference calls informative.
 For example, in a comment letter to Limelight Networks, Inc. issued on April 30, 2013, the SEC requested an expansion of the “Business-Customers” discussion of the 10-K in light of the firm’s conference call discussion of a planned contract termination.
 For example, in a comment letter to IGATE Corporation issued on July 15, 2014, the SEC highlighted that during its conference call, the firm disclosed more granular segment reporting than what appeared in their 10-K.
SEC. 2018. Request for Comment on Earnings Releases and Quarterly Reports. Washington, DC: SEC.
SEC. 2019a. Fiscal Year 2020 Congressional Budget Justification and Annual Performance Plan; Fiscal Year 2018 Annual Performance Report. Washington, DC: SEC.
SEC. 2019b. Division of Corporation Finance filing review process. https://www.sec.gov/divisions/corpfin/cffilingreview.htm. Accessed on 8/20/2022.
This post comes to us from Alina Lerman at the University of Connecticut, Thomas D. Steffen at Yale University School of Management, and Kangkang Zhang at the University of Connecticut. It is based on their recent paper, “The SEC Review of Earnings Conference Calls,” available here.