The Market Impact of Weakening SEC Enforcement Tools

Abstract

We exploit the U.S. Supreme Court decisions of Kokesh v. SEC [2017] and Lucia v. SEC [2018] as a unique identification strategy to investigate the value of securities law enforcement. Both decisions were unanticipated legal changes that substantially weaken the SEC’s enforcement tools. Using an event study framework, we find a significantly negative price response to both the Kokesh and Lucia rulings, indicating shareholders view the weakening of SEC enforcement tools as value destroying for the average firm. Cross-sectional tests reveal that the negative price response is particularly severe for firms where misappropriation risks are more pronounced and for firms located closer to SEC offices, where enforcement tends to be more effective. Our findings can help inform the ongoing debate on the value and importance of public enforcement.