The Market Impact of Weakening SEC Enforcement Tools

51 Pages Posted: 13 Dec 2018 Last revised: 9 Feb 2021

See all articles by Nerissa C. Brown

Nerissa C. Brown

University of Illinois at Urbana-Champaign

Brian Gale

University of Washington - Department of Accounting; University of Washington

Adrienna A. Huffman

The Brattle Group

Date Written: February 8, 2021

Abstract


We exploit the U.S. Supreme Court decisions of Kokesh v. SEC [2017] and Lucia v. SEC [2018] as a unique identification strategy to investigate the value of securities law enforcement. Both decisions were unanticipated legal changes that substantially weaken the SEC’s enforcement tools. Using an event study framework, we find a significantly negative price response to both the Kokesh and Lucia rulings, indicating shareholders view the weakening of SEC enforcement tools as value destroying for the average firm. Cross-sectional tests reveal that the negative price response is particularly severe for firms where misappropriation risks are more pronounced and for firms located closer to SEC offices, where enforcement tends to be more effective. Our findings can help inform the ongoing debate on the value and importance of public enforcement.

Keywords: SEC, securities law enforcement, regulation, governance

JEL Classification: G18, G30, K22, K42, M40, M48

Suggested Citation

Brown, Nerissa C. and Gale, Brian and Huffman, Adrienna A., The Market Impact of Weakening SEC Enforcement Tools (February 8, 2021). Available at SSRN: https://ssrn.com/abstract=3292548 or http://dx.doi.org/10.2139/ssrn.3292548

Nerissa C. Brown (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Brian Gale

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

University of Washington ( email )

Box 353200
Seattle, WA 91895
United States

Adrienna A. Huffman

The Brattle Group ( email )

San Francisco, CA 9133
United States

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