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

Abstract

This paper presents the first evidence of the effect of financial regulators’ social media use on corporate and individual behavior. Using the staggered launch of U.S. Securities and Exchange Commission (SEC) regional offices’ Twitter accounts, I find that financial regulators’ presence on social media reduces opportunistic insider trading, customer complaints against investment advisers, and financial misreporting. Additional tests suggest that the salience and dissemination of regional offices’ enforcement activities via Twitter play a role. The deterrence effect of SEC regional offices’ Twitter use is concentrated among offices with more followers, firms with more retail investors, and advisers with more retail clients. I also show that investors react more strongly to enforcement actions after the enforced firm’s regional office initiates Twitter use. Taken together, the results suggest that financial regulators’ use of social media helps deter misconduct.