Regulatory Oversight and Reporting Incentives: Evidence from SEC Budget Allocations

This study examines the determinants and consequences of regulatory oversight of corporate disclosures. I investigate the extent to which industry-level political activity influences the intensity of regulatory oversight, and whether variation in the intensity of oversight affects managers’ reporting incentives. I exploit variation in the allocation of budgetary resources between the SEC’s disclosure review offices as a source of variation in the oversight of financial reporting and disclosures. I find evidence of a significant relationship between industry-level political activity and visibility and the allocation of resources to each office. I then use the amount of budgetary resources allocated to each office as a proxy for the intensity of the SEC oversight that firms in a given industry face. I provide evidence that when SEC oversight is more intense managers report lower discretionary accruals, managers are less likely to issue financial reports that will be subsequently restated, and firms’ bid-ask spreads decrease. Overall, the results suggest that SEC oversight plays an important role in shaping managers’ reporting and disclosure incentives. I am deeply indebted to the members of my dissertation committee for their patient guidance and insightful comments: Wayne Guay, Luzi Hail, Chris Ittner, Cathy Schrand, and Dan Taylor. I also thank Jennifer Altamuro, Chris Armstrong, Karthik Balakrishnan, Paul Fischer, Nick Gonedes, Mirko Heinle, Bob Holthausen, John Robinson, Stephanie Sikes, and Ro Verrecchia for their thoughtful discussions. In addition, two anonymous officials provided me with invaluable insight into the SEC’s disclosure review and budgeting processes. My fellow Ph.D. students have provided much appreciated comments and support, particularly Michael Carniol and Stefan Schantl. Finally, I would like to thank the Wharton School and the Deloitte Foundation for their generous financial support.