Undisclosed SEC Investigations

The Cost of Fraud Prediction Errors

“…As such, there is a limit to the number of investigations regulators can undertake and the number of false positives for regulators is thus capped. Until recently, it was not possible to estimate the number of investigations undertaken by the SEC, but using Freedom of Information Act (FOIA) requests, a number of studies estimate that the number of misreporting investigations ranges from 50 to 100 per year (Blackburne et al, 2020;Bonsall et al 2021;Holzman et al 2021). 17 For this reason, when estimating regulators false positive costs, we limit the number of flagged firms investigated by the SEC to the top 50 to top 100 ranks for each model in a given year.…”

“…Although we rely on previous research for much of our estimation of costs, consider alternative constructs, and conduct sensitivity tests, we cannot rule out that our costs estimates are incomplete, nor assess the extent to which they measure decision makers' costs with error. 3 We consider costs as low as 1% following recent studies that exploit data obtained via Freedom of Information Act (FOIA) requests and report that denials of FOIA requests lower future returns (Blackburne et al 2020, Coleman et al 2020. We use 1% of the market value of equity as representation of the likely cost of indirectly informing the public that the SEC is investigating a false positive.…”

“…Although not always reported, it is not unusual for sample abnormal returns over one-year periods to be non-zero. For example,Blackburne et al (2020) examine over 81,000 firm-year observations over the period 2000-2017 and report market-adjusted one-year abnormal returns averaging 6.0% for the 73,197 firm-year observations without SEC investigations and 1% in 8,616 firms with SEC investigations (p. 7). Similarly,Brown et al (2020), report marketadjusted one-year abnormal returns averaging 10.6% for 37,301 non-AAER firm-year observations in the period 1994-2010, and 14.8% for 37,571 non-irregularity firm-year observations in the period2000-2012 (p. 267).…”

Responding to Activist Short Sellers: Allegations, Firm Responses, and Outcomes

“…[2011], Blackburne et al. [2020]). A response that signals the firm is innocent or will be costly to pursue may therefore deter an investigation.…”

Protecting Wall Street or Main Street: SEC Monitoring and Enforcement of Retail-Owned Firms

“…However, Henry Laurion from the University of Colorado obtained a comprehensive listing of all DCF reviews in our sample period regardless of whether a comment letter was issued via a Freedom of Information Act (FOIA) request and graciously shared this data with us.3 We thank Terrence Blackburne for sharing the dataset of all DOE investigations during our sample period which he obtained from the SEC via FOIA. This data is also used inBlackburne, et al (2020a),Blackburne, Kepler, Quinn, and Taylor (2020b), andBlackburne and Quinn (2020).…”