Government Preferences, SEC’s Enforcement Actions and Firms’ Accounting

I posit that the SEC’s enforcement actions are influenced by government’s preferences for firms that contribute to the government’s policy of fostering employment conditions. Using a large sample of listed US firms for the period 1982 to 2012, I investigate whether the resource-constrained SEC reduces its enforcement actions for labour-intense firms, a proxy for a firm’s contribution to employment conditions. I find that labour-intense firms are less likely to face an SEC enforcement action. Next, I also show that labour-intense firms are even less likely to face an SEC enforcement action in election years. All of these results hold after controlling for firms’ accounting quality and two alternative explanations for firms’ favourable treatment by the SEC, i.e., firms’ location and firms’ lobbying activities. Consistent with my hypotheses, these findings indicate that government preferences affect the SEC’s enforcement actions. Finally, I find some evidence that labour-intense firms exploit this favourable treatment by engaging in more aggressive accounting choices. My results suggest that firms that contribute to government policies are rewarded by reduced SEC enforcement actions.

This seminar is organised by the Erasmus Accounting Research Group.