Perception Matters: The Public's Perception of the SEC and Engagement in Financial Markets

Abstract

We examine whether public perception of the Securities and Exchange Commission (SEC) influences engagement with U.S. financial markets by developing a novel measure of SEC perception derived from tweets mentioning the SEC. Using this measure, we first document considerable time-series variation in the public's views of the primary financial market regulator; they hold a positive, neutral, and negative perception 29%, 58%, and 13% of the time, respectively. Then we examine the influence of SEC perception on the general public's engagementoperationalized with retail investor trading activities-with the stock market. We find that retail trading activity is significantly associated with SEC perception: daily retail turnover is 3.6% higher during periods of positive perception and 3.4% lower during periods of negative perception, relative to neutral periods. This relationship is more pronounced for firms where SEC oversight is particularly important-small firms and those with low institutional ownership-and when there is greater consensus in public perception. We also find that SEC perception influences retail trading behavior around earnings announcements: their trading volume is positively associated with SEC perception, and they rely more heavily on earnings information during periods of positive perception, consistent with enhanced perceived credibility of SEC-regulated disclosures. Collectively, our results highlight that the public's perception of the SEC shapes market engagement and information usage.

Keywords: Perception, Securities and Exchange Commission (SEC), Accounting Information, Retail Investors, Regulator, Financial Market Engagement