SEC Regulations and Firms

Abstract

This study examines the effect of SEC regulations on firm valuations and corporate policies over the past 50 years. I build a time-varying and industry-specific measure of SEC regulatory restrictions, based on the universe of effective SEC rules and machine-learning relevance of the regulations to each industry. My identification strategy uses a generalized difference-in-differences design, exploiting the staggered nature of large changes in SEC regulatory restrictions across industries. I find that firms increase their demand for compliance employees following increases in regulatory restrictions, suggesting heightened regulatory burdens. At the same time, the affected firms experience increases in valuation and operating performance. The effects are asymmetric, where regulations have stronger impacts than deregulations. The results are consistent with increased regulatory burdens pushing out weaker companies, which increases the market power of other firms. Following increases in SEC restrictions, underperforming firms are more likely to exit the market, leading to more concentrated industries.

Keywords: Securities Regulation, SEC, Compliance, Valuation, Concentration, Machine Learning

JEL Classification: E22, G18, K22, L51, M48