The Impact of SEC Comment Letters on Stock Returns: A Comprehensive Analysis

Abstract This study investigates the impact of SEC comment letters on stock returns, focusing on their informational value and influence on investor behavior. SEC comment letters, issued to publicly traded companies, serve as regulatory tools to address deficiencies in corporate disclosures, enhancing transparency and compliance. By leveraging advanced natural language processing models, including FinBERT, VADER, and LMSentimentScore, this research evaluates the sentiment and thematic classifications of comment letters to assess their effect on market dynamics. The analysis encompasses thousands of SEC comment letters categorized into 11 distinct themes, paired with stock performance metrics to quantify their impact on returns. Findings reveal that sentiment scores, particularly from financial-specific models, exhibit a measurable but limited effect on stock price movements. Thematic content, such as issues related to Environmental, Social, and Governance (ESG) and Legal and Regulatory Compliance, demonstrates significant correlations with market reactions, highlighting the contextual relevance of specific categories. Additionally, the frequency of SEC filings is shown to moderate stock return volatility, with high-frequency filers experiencing reduced market sensitivity. This research contributes to the literature on financial regulation and market efficiency by integrating sentiment analysis and thematic categorization, offering insights into the nuanced effects of regulatory disclosures on stock performance. The findings underscore the role of SEC comment letters as critical instruments in maintaining market integrity and guiding investor expectations.