Regulating via Social Media: Deterrence Effects of the SEC's Use of Twitter

Abstract

We evaluate the effect of financial regulators’ social media use on misconduct by regulated entities. We study whether misconduct by firms and investment advisors declines around the staggered launch of Twitter accounts by regional offices of the U.S. Securities and Exchange Commission (SEC). Even though the tweets repackage information available on the SEC’s website, we find a reduction in opportunistic insider trading and financial misreporting for firms, and a reduction in customer complaints against investment advisers. Consistent with the tweets making enforcement actions more salient and widely disseminated, this deterrence effect is concentrated among (i) regional SEC offices with more Twitter followers and (ii) investment advisers with more retail clients.  In addition, we find Twitter adoption expands press coverage of the SEC’s work and the stock market reacts more strongly to SEC enforcement actions. Taken together, our results suggest that financial regulators’ use of social media, a relatively low-cost intervention, helps deter misconduct.

Keywords: Financial Regulator, Social Media, Corporate Misconduct

JEL Classification: G18, G20, G28, K2