What We Can Learn from Changes in Public SEC Filings

Title III CrowdfundingPeter R. Orszag, writing in Bloomberg View, highlights a study of public SEC-filed Form 10-K annual reports, which found that companies that make changes to the disclosure in their 10-Ks from one year to the next tend to have lower stock returns than average after publication of those changes. The study found that a significant majority of the changes constituted disclosure of negative information, so the resulting decline in performance is not surprising.

A study like this is possible because of the reality that much disclosure contained in periodic reports like Form 10-K (annual report) and Form 10-Q (quarterly report) is repeated verbatim from one year to the next. There are times when a company determines to revamp its disclosure for reasons other than divulging new and negative information, such as neutral changes in the company’s business activities, a desire to improve the readability of the prose, response to SEC comments to the disclosure, etc. But in most cases, the process undertaken by the lead draftsperson for a 10-K or 10-Q is to start with the immediately previous filing and make changes to that document only as needed to ensure that the disclosure is correct and updated.

The results of this study are heartening to me in the sense that it shows that public company disclosure requirements are successful in forcing companies to reveal information that is actually relevant and useful to investors. One can imagine an alternative system that was more form over substance that permitted companies to withhold truly material information. But for all the rhetoric about regulatory overreach and how the SEC’s requirements discourage companies from going public, the reality is that the system results in valuable information being disseminated to the investor community.