Abstract

We examine whether firms relocate to avoid the scrutiny of local Security and Exchange Commission (SEC) enforcement offices and find that financial misreporting activities are positively associated with the probability of headquarters being relocated out of the jurisdiction states of local SEC office. Firms whose financial statements suggest fraudulent activities are more likely to move to locations where the regional SEC office has a history of less intense scrutiny against local firms, and they tend to relocate without providing explicit reasons. Using shocks to SEC enforcement intensity for identification, we find that these firms are more likely to relocate after the shock. Our difference-in-difference tests further suggest that relocating firms with scrutiny avoidance as a motive exhibit higher fraud scores after relocation and are more likely to file earnings restatements than their matched peers. Our results provide new evidence on the fraudulent motives for headquarters relocation, and suggest that the intensity of SEC enforcement affects corporate strategies.

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