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.
Highlights
The Securities and Exchange Commission’s (SEC) enforcement actions have been subject to increased scrutiny following the SEC’s failure to detect several frauds such as those executed by Bernard Madoff and Sir Allen Stanford
I find that the lower likelihood of SEC enforcement actions against large employers is more pronounced in
I state the following hypothesis: Hypothesis 2b: In presidential election years, large employers are relatively less likely to be subject to an AAER if they are based in politically important states
Summary
The Securities and Exchange Commission’s (SEC) enforcement actions have been subject to increased scrutiny following the SEC’s failure to detect several frauds such as those executed by Bernard Madoff and Sir Allen Stanford (see e.g., Henriques 2009; Waas 2012). A growing literature in accounting examines the reasons for such failure in SEC enforcement by investigating the SEC’s choice of enforcement targets. While these studies recognize that the SEC and its enforcement actions are subject to political influence, they do not consider that such influence by the president and Congress (“government”) may reflect voters’ interests—independent of firms’ political connections.. While these studies recognize that the SEC and its enforcement actions are subject to political influence, they do not consider that such influence by the president and Congress (“government”) may reflect voters’ interests—independent of firms’ political connections.1 Economists such as Stigler (1971) and Peltzman (1976) have long emphasized that the government influences regulations and regulatory agencies to reflect both voters’ and special interests in order to maximize political support. I investigate whether the government’s influence on the SEC reflects voters’ interests
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