Government Preferences and SEC Enforcement

Abstract

I examine whether political influence by the government as a response to voters' interest in employment conditions is reflected in the enforcement actions of the Securities and Exchange Commission (SEC). I find that large employers are less likely to be subject to an SEC enforcement action, after controlling for firm size, accounting quality, distance to SEC office, and political contributions, among other factors. Next, I show that large employers are less likely to face an SEC enforcement action in presidential election years if they are headquartered in politically important states. I also find that firms that employ a larger proportion of a congressional district's total workforce and are located in districts with high unemployment rates are less likely to be subject to an SEC enforcement action if the incumbent congressman serves on a committee that oversees the SEC. These findings suggest that voters' interests are reflected in SEC enforcement.

U.S. Congressional Committees and S.E.C. Enforcement Against Financial Misconduct

“…Our findings complement those in a concurrent working paper by Heese (2015). He shows that firms are less likely to face an SEC enforcement action during presidential election years in politically important states.…”

Is the SEC captured? Evidence from comment-letter reviews

“…The possibility of regulatory capture is moderated by the idea that Congress and the president likely balance special-interest favors with voter support (also see Heese 2015). If politicians and regulators go too far in terms of providing special-interest favors (e.g., sparing politically connected firms from enforcement actions even after egregious accounting violations or, at least, doing so too often), then these public agents are likely to face voter backlash (the "political cost hypothesis" of Watts and Zimmerman 1978).…”

Local Policy Risk and IPO Performance

“…Consequently, it would not be unexpected to find that political proximity can be reflected in a more lenient treatment to electorally important firms (Heese, 2015). Not surprisingly, some empirical evidence confirms that this inclination was evident in the case of government bailouts during the 2008 financial crisis,…”