Events

Mr. David Swanson
Ph.D. Candidate in Business Administration (Accounting)
Simon Business School
University of Rochester

I identify the strategic role of SEC public enforcement in a hybrid public-private enforcement system. Exploiting two US Supreme Court rulings as natural experiments that restricted private litigation, I find that the SEC proactively responded by filling in the enforcement gap for affected firms, holding the initiation of financial misconduct constant. However, the SEC filled the enforcement gap incompletely and with spillover effects, which sheds light on the global policy debate about whether to strengthen or weaken private litigation. There were spillover effects, given the agency’s binding resource constraints, because the SEC deprioritized investigating unaffected firms and investigation backlog increased. I document that the SEC targets and has expertise in pursuing financially distressed firms, but the SEC decreased its specialization when filling in the enforcement gap created by restricting private litigation. In addition, restricting private litigation weakened monitoring pressure which increased SEC capture by industry. Although the SEC tried to fill the enforcement gap, the agency did not fill the gap in the deterrence of misconduct on net.