"Wearing Out the Watchdog: SEC Case Backlog and Investigation Likelihood"
In the wake of corporate scandals, the SEC often provides a defense of being overworked. We examine a comprehensive set of investigations by SEC Division of Enforcement offices to provide evidence on the consequences of busyness. Our evidence suggests that that higher office case backlog materially decreases the likelihood that the SEC opens a new investigation. Further, when backlog is higher the SEC is less likely to open cases that are costlier to investigate (e.g., larger firms, less familiarity). Even when cases are opened backlog appears to reduce the likelihood of an enforcement action and penalty amounts levied against the firm. Perhaps most importantly, we find evidence suggesting that backlog may lead to adverse consequences in that non-investigated restatement firms experience additional future restatements and worse future stock returns during periods of increased backlog.
Co-authored with Samuel B. Bonsall (Smeal College of Business, The Pennsylvania State University) and Eric R. Holzman (Fisher School of Business, The Ohio State University)