Wearing Out the Watchdog : The Impact of SEC Case Backlog on the Formal Investigation Process

We examine a comprehensive set of investigations by SEC Division of Enforcement offices to provide evidence on the consequences of busyness on the formal investigation process. Our evidence suggests that higher office case backlog decreases the likelihood of investigation initiation. Consistent with the SEC’s commitment to its stated priorities, our results show no evidence that higher backlog affects the SEC’s ability to pursue cases with revenue recognition concerns and high insider trading. Surprisingly and inconsistent with SEC priorities, our findings indicate that busy SEC offices are less likely to pursue cases with the largest shareholder losses — likely because large-loss cases take longer to close. Backlog also appears to impact pursued investigations, leading to longer investigations, a lower AAER likelihood, and smaller SEC or DOJ penalties. Our final analyses provide modest small sample evidence that uninvestigated firms exhibit lower earnings quality and returns in future periods. Collectively, our evidence suggests that busyness impacts the investigation process, ranging from case priorities to sanctions and penalties assessed