Skip to main content
SpringerLink
Log in

Protecting wall street or main street: SEC monitoring and enforcement of retail-owned firms

  • Published:
Review of Accounting Studies Aims and scope Submit manuscript

Abstract

This study examines whether retail ownership of a firm is associated with the likelihood that the firm is subject to monitoring and enforcement by the two largest divisions of the SEC. Monitoring is a form of ex ante or preventative regulatory oversight, while enforcement is a form of ex post or punitive oversight. We find a negative association between retail ownership and SEC monitoring. In contrast, we find a positive association between retail ownership and SEC enforcement. These results suggest that the SEC is less likely to monitor firms with high retail ownership, potentially leaving current retail investors more vulnerable to unresolved financial reporting issues. Additionally, the SEC is more likely to issue enforcement actions against firms with high retail ownership, imposing costs on current retail investors when the firm is accused of egregious cases of perceived financial misreporting.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1

Similar content being viewed by others

Notes

  1. While referrals from DCF to DOE for potential enforcement do happen, they represent a small fraction of all DOE investigations (Boone et al. 2013). This is evidence that these two divisions do operate at least partially independently and might identify target firms using different decision rules.

  2. We acknowledge that Dechow et al. (2016) do find a delayed but negative reaction to SEC comment letters that address revenue recognition issues, particularly when there was insider selling ahead of the comment letter release, but this is a specific subset of comment letters.

  3. Downloads of disclosure filings from EDGAR have been used as a measure of regulatory oversight of several different agencies, including the IRS (Bozanic et al. 2017a, b) and the SEC itself (Stice-Lawrence 2021; Holzman et al. 2022). See Stice-Lawrence (2021) for a discussion of this measure as it relates specifically to SEC monitoring along with evidence of its association with the work of DCF (e.g., SOX 408 review priorities and SEC comment letters).

  4. One plausible mechanism, discussed in Duro et al. (2019), is that the presence of institutional investors increases reputation costs for the SEC staff and incentivizes them to exert more monitoring effort in what the authors call a “supervisory discipline” governance mechanism.

  5. One recent exception is Campbell et al. (2019), who study self-reported stock positions by individual investors on the website SeekingAlpha.com. However, they do not examine determinants of the level of retail ownership.

  6. We acknowledge the possibility that the SEC is already aware of the associations we document and that they represent an optimal mix of monitoring and enforcement for different types of firms. However, in private communications with several SEC staff, no one has suggested that this is the case.

  7. See Appendix Fig. 2 for a diagram of the SEC Organizational Chart. Note that the Division of Examinations was called the Office of Compliance Inspections and Examinations (OCIE) prior to growing its staff to the point of reaching division status in December 2020 (https://www.sec.gov/news/public-statement/joint-statement-division-examinations).

  8. The five SOX 408 criteria are prior restatements, stock price volatility, market capitalization, emerging companies, and material operations to a sector of the economy.

  9. The nine criteria explicitly stated in the Enforcement Manual are as follows: 1) whether the matter presents an opportunity to send a particularly strong and effective message of deterrence, including with respect to markets, products and transactions that are newly developing, or that are long established but which by their nature present limited opportunities to detect wrongdoing and thus to deter misconduct; 2) whether the matter involves particularly egregious or extensive misconduct; 3) whether the matter involves potentially widespread and extensive harm to investors; 4) whether the matter involves misconduct by persons occupying positions of substantial authority or responsibility, or who owe fiduciary or other enhanced duties and obligations to a broad group of investors or others; 5) whether the matter involves potential wrongdoing as prohibited under newly enacted legislation or regulatory rules; 6) whether the potential misconduct occurred in connection with products, markets, transactions, or practices that pose particularly significant risks for investors or a systemically important sector of the market; 7) whether the matter involves a substantial number of potential victims and/or particularly vulnerable victims; 8) whether the matter involves products, markets, transactions, or practices that [DOE] has identified as priority areas; and 9) whether the matter provides an opportunity to pursue priority interests shared by other law enforcement agencies on a coordinated basis.

  10. We formally define all variables in detail in Appendix Table 10.

  11. We cluster standard errors by firm as we only have 10 years of data, which is an insufficient number of clusters and can result in erroneous inferences (Petersen 2009). Note also that we estimate an OLS regression when Downloads is the dependent variable and a probit regression when Review or 10 K Comment is the dependent variable.

  12. Holzman et al. (2022) use these data as a proxy of attention by DOE, but only after conditioning on the presence of an open investigation, which is much less common than a DCF review.

  13. SOX 408 explicitly requires the SEC to review Form 10-K as part of its periodic reviews.

  14. In the absence of an SEC comment letter, there is no public disclosure that a review occurred. However, Henry Laurion from the University of Colorado obtained a comprehensive listing of all DCF reviews in our sample period (regardless of whether a comment letter was issued) via a Freedom of Information Act (FOIA) request and graciously shared this data with us.

  15. In this analysis we add two comment letter–specific controls: the number of filings reviewed (Filings) and the number of issues (Issues) referenced in the comment letter. More filings and more issues being reviewed likely result in a larger number of rounds needed to resolve the issues.

  16. We thank Terrence Blackburne for sharing the dataset of all DOE investigations during our sample period, which he obtained from the SEC via FOIA. This data is also used in Blackburne et al. (2020, 2021), and Blackburne and Quinn (2023).

  17. We do not include SEC office fixed effects for the enforcement tests because DOE is not broken down into industry based offices. Additionally, if we include SIC or FF industry fixed effects in these tests we lose many observations and statistical power given the relatively small sample size.

  18. Dechow et al. (2011) originally collected the data provided by the CFRM.

  19. There are fewer observations in the AAER sample than in the investigations sample because there are two years in our sample (2012 and 2014) when the restatement observations did not result in any AAERs, and the year fixed effects subsume all variation of observations from those years.

  20. Untabulated coefficient estimates on the SEC office fixed effects suggest the only industry group that is significantly related to retail ownership is the Transportation and Leisure industry which tends to have less retail ownership.

  21. Our results are robust to including all DCF reviews, not only 10-K reviews.

  22. A separate concern is that institutional investors are more able to foresee problems and sell off shares in firms that will likely be subject to an investigation or an AAER prior to these events. This could lead to similar results to what we document; however, we observe no differential trend in ownership characteristics between firms subject to an investigation or an AAER and firms not subject to these events in the five years prior to the restatement.

References

  • Altman, E.I. 1968. Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. The Journal of Finance 23 (4): 589.

    Article  Google Scholar 

  • Asthana, S., S. Balsam, and S. Sankaraguruswamy. 2004. Differential response of small versus large investors to 10-K filings on EDGAR. The Accounting Review 79 (3): 571–589.

    Article  Google Scholar 

  • Barber, B.M., and T. Odean. 2008. All that glitters: The effect of attention and news on the buying behavior of individual and institutional investors. The Review of Financial Studies 21 (2): 785–818.

    Article  Google Scholar 

  • Becker, G.S. 1968. Crime and punishment: an economic approach. In The Economic Dimensions of Crime, 13–68. London: Palgrave Macmillan.

  • Beneish, M.D. 1997. Detecting GAAP violation: Implications for assessing earnings management among firms with extreme financial performance. Journal of Accounting and Public Policy 16 (3): 271–309.

    Article  Google Scholar 

  • Blackburne, T., and P. Quinn. 2023. Disclosure speed: evidence from nonpublic SEC investigations The Accounting Review, Forthcoming

  • Blackburne, T., Z. Bozanic, B. A. Johnson, and D. Roulstone. 2020. The regulatory observer effect: Large-sample evidence from SEC investigations. Working Paper. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3514915. Accessed 13 Dec 2022.

  • Blackburne, T., J. Kepler, P. Quinn, and D. Taylor. 2021. Undisclosed SEC investigations. Management Science 67 (6): 3403–3418.

    Article  Google Scholar 

  • Boehmer, E., C.M. Jones, X. Zhang, and X. Zhang. 2021. Tracking retail investor activity. The Journal of Finance 76 (5): 2249–2305.

    Article  Google Scholar 

  • Boone, J., C. Linthicum, and A. Poe. 2013. Characteristics of accounting standards and SEC review comments. Accounting Horizons 27 (4): 711–736.

    Article  Google Scholar 

  • Bozanic, Z., J.R. Dietrich, and B.A. Johnson. 2017a. SEC comment letters and firm disclosure. Journal of Accounting and Public Policy 36 (5): 337–357.

    Article  Google Scholar 

  • Bozanic, Z., J. Hoopes, J. Thornock, and B. Williams. 2017b. IRS attention. Journal of Accounting Research 55: 79–114.

    Article  Google Scholar 

  • Cassell, C.A., L.M. Dreher, and L.A. Myers. 2013. Reviewing the SEC’s review process: 10-K comment letters and the cost of remediation. The Accounting Review 88 (6): 1875–1908.

    Article  Google Scholar 

  • Campbell, J.L., M.D. DeAngelis, and J.R. Moon Jr. 2019. Skin in the game: Personal stock holdings and investors’ response to stock analysis on social media. Review of Accounting Studies 24: 731–779.

    Article  Google Scholar 

  • Correia, M.M. 2014. Political connections and SEC enforcement. Journal of Accounting and Economics 57 (2–3): 241–262.

    Article  Google Scholar 

  • Dechow, P.M., R.G. Sloan, and A.P. Sweeney. 1996. Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research 13 (1): 1–36.

    Article  Google Scholar 

  • Dechow, P.M., W. Ge, C.R. Larson, and R.G. Sloan. 2011. Predicting material accounting misstatements. Contemporary Accounting Research 28 (1): 17–82.

    Article  Google Scholar 

  • Dechow, P.M., A. Lawrence, and J.P. Ryans. 2016. SEC comment letters and insider sales. The Accounting Review 91 (2): 401–439.

    Article  Google Scholar 

  • DeFond, M.L. 1992. The association between changes in client firm agency costs and auditor switching. Auditing: A Journal of Practice & Theory 11 (1): 16–31.

    Google Scholar 

  • Drake, M.S., B.A. Johnson, D.T. Roulstone, and J.R. Thornock. 2020. Is there informaiton content in information acquisition? The Accounting Review 95 (2): 113–139.

    Article  Google Scholar 

  • Duro, M., J. Heese, and G. Ormazabal. 2019. The effect of enforcement transparency: Evidence from SEC comment-letter reviews. Review of Accounting Studies 24: 780–823.

    Article  Google Scholar 

  • Ettredge, M.L., K. Johnstone, M. Stone, and Q. Wang. 2011. The effects of firm size, corporate governance quality, and bad news on disclosure compliance. Review of Accounting Studies 16 (4): 866–889.

    Article  Google Scholar 

  • Farrell, M., T.C. Green, R. Jame, and S. Markov. 2022. The democratization of investment research and the informativeness of retail investor trading. Journal of Financial Economics 145 (2): 616–641.

    Article  Google Scholar 

  • Files, R. 2012. SEC enforcement: Does forthright disclosure and cooperation really matter? Journal of Accounting and Economics 53 (1–2): 353–374.

    Article  Google Scholar 

  • Francis, J., D. Philbrick, and K. Schipper. 1994. Shareholder litigation and corporate disclosures. Journal of Accounting Research 32 (2): 137–164.

    Article  Google Scholar 

  • Graham, J.R., and A. Kumar. 2006. Do dividend clienteles exist? evidence on dividend preferences of retail investors. The Journal of Finance 61 (3): 1305–1336.

    Article  Google Scholar 

  • Hartzell, J., and L. Starks. 2003. Institutional investors and executive compensation. The Journal of Finance 58 (6): 2351–2374.

    Article  Google Scholar 

  • Heese, J. 2019. The political influence of voters’ interests on SEC enforcement. Contemporary Accounting Research 36 (2): 869–903.

    Article  Google Scholar 

  • Heese, J., M. Khan, and K. Ramanna. 2017. Is the SEC captured? evidence from comment-letter reviews. Journal of Accounting and Economics 64 (1): 98–122.

    Article  Google Scholar 

  • Holzman, E., N. Marshall, and B. Schmidt. 2022. Who's on the hot seat for an SEC investigation? Working Paper. Available at SSRN:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3223815

  • Johnston, R., and R. Petacchi. 2017. Regulatory oversight of financial reporting: Securities and Exchange Commission comment letters. Contemporary Accounting Research 34 (2): 1128–1155.

    Article  Google Scholar 

  • Kedia, S., and S. Rajgopal. 2011. Do the SEC’s enforcement preferences affect corporate misconduct? Journal of Accounting and Economics 51 (3): 259–278.

    Article  Google Scholar 

  • Kumar, A., and C.M. Lee. 2006. Retail investor sentiment and return comovements. The Journal of Finance 61 (5): 2451–2486.

    Article  Google Scholar 

  • Leuz, C., and P.D. Wysocki. 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research 54 (2): 525–622.

    Article  Google Scholar 

  • Miller, G.S. 2006. The ress as a watchdog for accounting fraud. Journal of Accounting Research 44 (5): 1001–1033.

    Article  Google Scholar 

  • Nicholls, C. 2016. The impact of SEC investigations and accounting and auditing enforcement releases on firms’ cost of equity capital. Review of Quantitative Finance and Accounting 47 (1): 57–82.

    Article  Google Scholar 

  • Petersen, M.A. 2009. Estimating standard errors in finance panel data sets: Comparing approaches. The Review of Financial Studies 22 (1): 435–480.

    Article  Google Scholar 

  • Peterson, K. 2012. Accounting complexity, misreporting, and the consequences of misreporting. Review of Accounting Studies 17 (1): 72–95.

    Article  Google Scholar 

  • Rice, S.C., D.P. Weber, and B. Wu. 2015. Does SOX 404 have teeth? consequences of the failure to report existing internal control weaknesses. The Accounting Review 90 (3): 1169–1200.

    Article  Google Scholar 

  • Securities and Exchange Commission. 2017. Enforcement Manual. Retrieved from https://www.sec.gov/divisions/enforce/enforcementmanual.pdf.

  • Securities and Exchange Commission. 2019. Division of Corporation Finance Filing Review Process. Retrieved from https://www.sec.gov/divisions/corpfin/cffilingreview.htm.

  • Stice-Lawrence, L. 2021. Monitoring decisions and frictions at the SEC. Working Paper. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3485468N

  • Yu, F., and X. Yu. 2011. Corporate lobbying and fraud detection. The Journal of Financial and Quantitative Analysis 46 (6): 1865–1891.

    Article  Google Scholar 

Download references

Acknowledgements

We thank Patricia Dechow (editor), two anonymous reviewers, Terrence Blackburne, Zahn Bozanic, John Campbell, Jonas Heese, Brian Miller (discussant), Robbie Moon, Pervin Shroff, Xiaoli Tian, Helen Zhang, and several SEC staff members for insightful comments and suggestions. We also thank workshop participants at the University of Minnesota and conference participants at the BYU Accounting Research Symposium and the Hawaii Accounting Research Conference for helpful feedback. We especially thank Henry Laurion and Terrence Blackburne for sharing data obtained via FOIA on non-public DCF reviews and DOE investigations, respectively. Johnson recently served as an SEC Academic Fellow in the Office of the Chief Accountant and formerly worked as a staff accountant in the Division of Corporation Finance. The views expressed by Johnson and his co-authors are their own and do not necessarily represent those of the Commission or any of the SEC staff.

Author information

Authors and Affiliations

  1. University of Minnesota, 321 19Th Ave South, Minneapolis, MN, 55455, USA

    Michael Iselin

  2. George Mason University, 4400 University Drive, Fairfax, VA, 22030, USA

    Bret Johnson

  3. London School of Economics and Political Science, 44 Lincoln’s Inn Fields, London, WC2A 3LY, UK

    Jacob Ott

  4. Monash University, 900 Dandenong Rd, Caulfield East, VIC, 3145, Australia

    Jacob Raleigh

Authors
  1. Michael Iselin
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Bret Johnson
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Jacob Ott
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Jacob Raleigh
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Michael Iselin.

Additional information

Publisher's note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendices

Appendix 1 

Figure 2.

Fig. 2
figure 2

SEC Organizational Chart. Source: https://www.sec.gov/about/secorg.pdf

Full size image

Appendix 2

Table 10.

Table 10 Variable definitions
Full size table

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Iselin, M., Johnson, B., Ott, J. et al. Protecting wall street or main street: SEC monitoring and enforcement of retail-owned firms. Rev Account Stud (2022). https://doi.org/10.1007/s11142-022-09742-9

Download citation

  • Accepted:

  • Published:

  • DOI: https://doi.org/10.1007/s11142-022-09742-9

Keywords

JEL classification

Search

Navigation