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Dr. Nerissa C. Brown
Associate Professor of Accountancy
and PwC Faculty Fellow
University of Illinois at Urbana-Champaign

We exploit the landmark U.S. Supreme Court decision in Kokesh v. SEC (2017) as a unique identification strategy to investigate the perceived value of SEC enforcement for U.S.-domiciled firms. The Kokesh decision was an unanticipated legal change that limits the SEC’s ability to obtain disgorgement (the forfeiture of ill-gotten gains) for securities law violations. Disgorgement is widely viewed as the SEC’s most potent enforcement tool and is routinely applied in enforcement actions against corporations and firm executives. Using an event study framework, we examine stock price reactions to key events related to the Kokesh ruling and whether these price effects vary with firm-specific factors that reflect the economic benefits and costs of enforcement. We find a significantly negative price response to the Kokesh events, consistent with shareholders viewing the erosion in SEC enforcement powers as value destroying for the average firm. Our cross-sectional tests reveal that the negative price response is more severe for firms with stronger governance and weaker for firms facing higher enforcement costs. Taken together, our evidence suggests that shareholders place significant value on SEC enforcement, but that this value varies with the costs and benefits associated with regulatory oversight and enforcement.