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

Abstract

We document that firms with powerful representation on U.S. congressional committees that oversee the Securities and Exchange Commission (SEC) are less likely to face regulatory scrutiny for financial misconduct relative to other firms. An exogenous decrease in firms’ powerful committee representation results in an increase in the likelihood that those firms will subsequently face SEC enforcement actions. Furthermore, conditional on receiving SEC enforcement action, the same firms also receive materially smaller monetary penalties relative to other transgressing firms. Our findings appear to be driven by firm-side efforts to supply higher quality financial reports rather than because of political capture. In sum our study highlights a direct effect on financial reporting from political representation on specific U.S. congressional committees.