A thematic analysis of code of ethics disclosures in SEC 8‐K Item 5.05

Abstract

The Securities and Exchange Commission requires the disclosure of changes to or waivers of corporate codes of ethics. Because the nature of amendments or waivers can vary, we expect the text of Item 5.05 to include different topics within different filings. We examine the population of these disclosures in Item 5.05 8‐K filings from 2004 to 2020. While previous studies utilized small samples (fewer than 50 observations) to examine limited aspects of these filings, we use the population of these filings from 2004 to 2020 (2121 8‐K filings) to elucidate the nature and details of the disclosures. We assess whether Latent Dirichlet Allocation—a computational linguistics technique—can help discern the underlying topics represented in filings. While the Securities and Exchange Commission identifies two topics—amendments and waivers—the Latent Dirichlet Allocation analysis reveals four topics (three related to amendments): (1) code updates and clarifications; (2) combining codes of conduct for all officers and employees, or splitting codes to include a code directly applicable to senior financial officers; (3) codes of ethics waivers; and (4) substantive code changes. The overall trend is for fewer 8‐Ks to be filed in recent years, with updates and clarifications becoming the predominant filing type. Our results further indicate that Item 5.05s related to updates and clarifications, and those related to combined or split codes, use fewer words and are more easily readable than those disclosing waivers or material code changes. Although we find no significant price reaction to Item 5.05 8‐K filings, we find significant trading volume and volatility reactions, suggesting that these disclosures could give rise to differences in opinion among investors, which is consistent with the US Senate's assertion that these disclosures are of interest to investors.