Are Lessons Well Learned? Evidence from SEC Enforcement Releases

42 Pages Posted: 8 Mar 2020 Last revised: 7 Mar 2022

See all articles by Wenjiao Cao

Wenjiao Cao

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: February 13, 2020


SEC Accounting and Auditing Enforcement Releases (AAERs) sometimes demonstrate wealth pursuing through compensation schemes as a motive for misreporting (henceforth, compensation-mentioned releases or CMRs). Do firms revise their CEO compensation after CMRs to prevent future misreporting? Conventional Bayesian learning suggests that firms update the misreporting probability as more information becomes available. However, the availability heuristic suggests that firms assess the misreporting probability subjectively based on how easily they recall these releases. I examine the equity-based compensation of non-accused firms and find firms that proactively benchmark their CEO compensation against fraudulent firms named in CMRs significantly reduce their CEOs’ risk-taking incentives, manifested in replacing option grants with restricted stock grants. Changes are greater when firms are closer (both in geography and social identity) to CMRs, which is consistent with the availability heuristic hypothesis. The findings suggest that narratives on misreporting motives in AAERs can affect corporate policies, which provide implications for resource-constrained regulators and corporate policy-makers.

Keywords: SEC enforcement actions; compensation design; limited attention; peer effects

JEL Classification: J33, M41, M52, G38

Suggested Citation

Cao, Wenjiao, Are Lessons Well Learned? Evidence from SEC Enforcement Releases (February 13, 2020). Available at SSRN:

Wenjiao Cao (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA

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