Government Preferences and SEC Enforcement

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

Regulator Leniency and Mispricing in Beneficent Nonprofits

We posit that nonprofits that provide a greater supply of unprofitable services (beneficent nonprofits) face lenient regulatory enforcement for mispricing in price-regulated markets. Consequently, beneficent nonprofits exploit such regulatory leniency and exhibit higher mispricing. Drawing on organizational legitimacy theory, we argue that both regulators and beneficent nonprofits seek to protect their legitimacy with stakeholders, including those who demand access to unprofitable services. Using data from hospitals, we examine mispricing via “upcoding”, which involves misclassifying ailment severity. Archival analysis indicates less stringent regulatory enforcement of upcoding for beneficent nonprofit hospitals, defined as hospitals that provide higher charity care and medical education. After observing regulator leniency, beneficent hospitals demonstrate higher upcoding. Our results suggest that lenient enforcement assists beneficent nonprofits to obtain higher revenues in price-regulated markets

When Executives Pledge Integrity: The Effect of the Accountant’s Oath on Firms’ Financial Reporting

We study the effect of executives’ pledges of integrity on firms’ financial reporting outcomes by exploiting a 2016 regulation that requires holders of Dutch professional accounting degrees to pledge an integrity oath. We identify chief executive officers (CEOs) and chief financial officers (CFOs) required to take the integrity oath and find that firms reduce income-increasing discretionary accruals after executives took the oath. These firms also reduce discretionary expenditures, indicating that oath-taking executives reduce overall earnings management and do not merely substitute accruals-based with real-activities earnings management. These effects are concentrated in firms where the CFO took the oath. Overall, our results indicate that integrity oaths for executives improve firms’ financial reporting quality

Selective Regulator Decoupling and Organizations' Strategic Responses

Organizations often respond to institutional pressures by symbolically adopting policies and procedures but decoupling them from actual practice. Literature has examined why organizations decouple from regulatory pressures. In this study, we argue that decoupling occurs within regulatory agencies and results from a combination of conflicting institutional pressures, complex goals, and internal fragmentation. Further, regulatory decoupling is selective that is, regulators fail to adequately enforce standards only for one set of organizations. Regulated organizations that benefit from selective regulatory decoupling use nonmarket strategies to maintain their favorable regulatory status, and, in the process, selectively decouple their norms in one organizational activity but not others. As an empirical context, we use the hospital industry in which regulators have to balance conflicting pressures to be tough on fraud while maintaining the community's access to essential but unprofitable services, such as charity care and medical education. In response, hospital regulators selectively decouple and exhibit leniency in enforcement of mispricing practices toward "beneficent hospitals," defined as hospitals that provide more charity care and medical education. In turn, beneficent hospitals selectively decouple their service and profit goals by providing unprofitable services to uninsured patients, while mispricing insured patients to earn higher reimbursements

Is the SEC captured? Evidence from comment-letter reviews

SEC oversight of publicly listed firms ranges from comment letter (CL) reviews of firms’ reporting compliance to pursuing enforcement actions against violators. Prior literature finds that firm political connections (PC) negatively predict enforcement actions, inferring SEC capture. We present new evidence that firm PC positively predict CL reviews and substantive characteristics of such reviews, including the number of issues evaluated and the seniority of SEC staff involved. These results, robust to identification concerns, are inconsistent with SEC capture and indicate a more nuanced relation between firm PC and SEC oversight than previously suggested

When the local newspaper leaves town: The effects of local newspaper closures on corporate misconduct

We examine whether the local press is an effective monitor of corporate misconduct. Specifically, we study the effects of local newspaper closures on violations by local facilities of publicly listed firms. After a local newspaper closure, local facilities increase violations by 1.1% and penalties by 15.2%, indicating that the closures reduce firm monitoring by the press. This effect is not driven by the underlying economic conditions, the underlying local fraud environment, or the underlying firm conditions. Taken together, our findings indicate that local newspapers are an important monitor of firms’ misconduct