56 Pages Posted: 5 Jul 2011 Last revised: 4 Feb 2013
Date Written: January 14, 2013
We study the SEC’s allocation of enforcement resources in the wake of a salient public scandal. We focus on the SEC’s investigations of option backdating in the wake of numerous media articles on the practice of backdating. We find that the SEC shifted its mix of investigations significantly toward backdating investigations and away from investigations involving other accounting issues. We test the hypothesis that SEC pursued more marginal investigations into backdating at the expense of pursuing more egregious accounting issues. Our event study of stock market reactions to the initial disclosure of backdating investigations shows that those reactions declined over our sample period. We also find that later backdating investigations are less likely to target individuals and less likely to be accompanied by a parallel criminal investigation. Looking at the consequences of the SEC’s backdating investigations, later investigations were more likely to be terminated or produce no monetary penalties. We find that the magnitude of the option backdating accounting errors diminished over time relative to other accounting errors that attracted SEC investigations.
Keywords: Option Backdating, SEC Enforcement
JEL Classification: K22, K23
Suggested Citation: Suggested Citation
Choi, Stephen J. and Pritchard, Adam C. and Wiechman, Anat Carmy, Scandal Enforcement at the SEC: The Arc of the Option Backdating Investigations (January 14, 2013). U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 11-009; NYU Law and Economics Research Paper No. 11-20. Available at SSRN: https://ssrn.com/abstract=1876725 or http://dx.doi.org/10.2139/ssrn.1876725