When are firms on the hot seat? An analysis of SEC investigation preferences

Eric R. Holzman, Nathan T. Marshall, Brent A. Schmidt

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Little is known about how the SEC selects its targets for investigation. We study this subject using a new database of formal SEC investigations. We predict and find that case selection is associated with a firm's (i) likelihood of regulatory noncompliance, (ii) exposure to private sector scrutiny, and (iii) conspicuous public trigger events. The relationship between investigations and regulatory noncompliance and private sector scrutiny preferences is sensitive to SEC constraints, whereas the relationship with triggers is not. We also examine the association between investigation motives and enforcement actions, an important SEC outcome reported to Congress. While regulatory noncompliance-motivated and public trigger-motivated investigations are more likely to result in public charges, specifically when the SEC is constrained, private sector scrutiny-motivated investigations are less likely to result in public charges. Finally, investigation rates of potential targets are associated with the career trajectories of SEC personnel, while investigation outcomes are not.

Original languageEnglish (US)
Article number101610
JournalJournal of Accounting and Economics
Volume77
Issue number1
DOIs
StatePublished - Feb 2024

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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