HOW TO Reverse-engineer an Accounting Pitch: RE#1 – “SEC comment letters and insider sales” [Deechow, et al, 2015, TAR]

Posted by Robert Faff - Oct 13, 2018

For students beginning their training in research, academic literature can be wordy and hard to understand. Often students will try to read research articles like a novel – starting at the beginning and getting lost before the end. Student’s may highlight paragraphs and take notes, however these can be of limited value without a structured framework that allows your observations to be recorded in a format that can be used as a learning tool and as a set of reference material for later research. Using Faff’s (2015, 2018) Pitch template to reverse engineer literature in your chosen field provides such a framework to unpick research articles. You feel like you have something to show for your reading efforts. Using the template will increase your comprehension and help you understand the important parts of each paper. This framework will enable you to see patterns across articles and to start building knowledge and understanding of the field. Learning to use the tool takes some time and practice, but in the long term developing this skill will save you time reading (and re-reading) the literature and help you to hone in on areas of research interest faster and with more conviction

To access a brief 9-minute animation video that explains the reverse-pitching concept click the following link:

In this blog post, I initiate an ongoing “RE” series – aimed at accounting research. Herein, to this end, I illustrate the application of this “reverse engineering” technique using an example created by Bao Hoang Nguyen, at the time, undertaking his Masters in International Economics and Finance at the University of Queensland.

Bao completed the task for: Dechow, P. M., Lawrence, A., & Ryans, J. P. (2015). SEC comment letters and insider sales. The Accounting Review, 91(2), 401-439. Below is the first 3 elements of the pitch, which largely frame what the authors are trying to achieve in their study.

 (B) Basic Research Question:

Whether insiders benefit from trading before the release of comment letters? How do investors respond to the disclosure of SEC Comment Letters given high pre-disclosure insider sales?

(C) Key paper(s):            

Cassell, C. A., Dreher, L. M., & Myers, L. A. (2013). Reviewing the SEC's review process: 10-K comment letters and the cost of remediation. The Accounting Review, 88(6), 1875-1908.

Cohen, L., Malloy, C., & Pomorski, L. (2012). Decoding inside information. The Journal of Finance, 67(3), 1009-1043.

Huddart, S., Ke, B., & Shi, C. (2007). Jeopardy, non-public information, and insider trading around SEC 10-K and 10-Q filings. Journal of Accounting and Economics, 43(1), 3-36.

(D) Motivation/Puzzle: 

Comment letter correspondence between the Securities and Exchange Commission’s (SEC) Division of Corporation and companies has raised a concern about opportunistic insider trading because of the delay in making it publicly disclosed and the different perceptions of its importance. The SEC views most issues in comment letters as unlikely to move prices and, hence, as not material under the legal definition, whereas corporate executives are deeply concerned with investor perception of comment letters and willing to change their reporting practices to reduce the probability of receiving a comment letter. Therefore, the motivation of this study is to investigate whether opportunistic insiders take advantage of the SEC’s policy to benefit themselves.

His full RE pitch is available as Internet Appendix A123:


The post builds on my earlier posts on the EAA ARC:

* ““Pitching Research” to an accounting academic expert – a difficult task made easier”:

* ***ACCOUNTING ROOKIE ALERT*** How to Pitch your Job Market Paper!:

* On the Art of Pitching your Accounting Research:

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