Information Acquisition Cost and Comment Letter Review Process—Evidence From China

This study investigates the effect of information acquisition costs on regulator’s review process over financial reporting. Using hand-collected comment letter (CL) data from the Shanghai Stock Exchange, we find that firms located farther away from the regulator are more likely to receive CLs and the review outcomes are more substantive. Additional analyses using propensity score-matched sample, first-tier city sample and misreported sample are consistent with our main findings. More importantly, our empirical results show that the effect of information acquisition cost not only manifest in geographical distance, transportation infrastructure development and economic linkage are also important dimensions through which information acquisition cost would affect regulator’s monitoring activities. In contrast to the findings of prior literature, our results suggest that the regulator uses the review process to mitigate the constraint in monitoring firms with high information acquisition costs.