Return and Liquidity Response to SEC Investigation Announcements
35 Pages Posted: 26 Oct 2014
Date Written: October 24, 2014
This study measures the impact government enforcement actions have on investor confidence by examining changes in market quality in the firms investigated by the Securities and Exchange Commission for fraud. The market quality measures we test include returns, price volatility, spreads, and Amihud’s (2002) illiquidity measure. We find that returns improve and price volatility reduces during an SEC investigation. However, spreads widen and illiquidity significantly increases after controlling for the known determinants of liquidity. Our work highlights some of the benefits and costs of having an active regulator of the US securities market.
Keywords: SEC Investigation, Liquidity
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