Less is more? Government-imposed resource constraints and SEC regulatory outcomes
OA Version
Citation
Abstract
I study the effect of government-imposed resource constraints on the Securities and Exchange Commission (“SEC”) filing review process through the SEC’s implementation of a hiring freeze. First, I document that the hiring freeze causes a shift from full cover-to-cover reviews to limited scope reviews that use less staff time. In my primary analysis, I find that the SEC’s propensity to detect financial reporting errors increases 13–16 percent in full scope reviews in comparison to limited scope reviews, implying that the SEC improves resource allocation between review types. However, I also show that the SEC’sresponse is associated with detecting a lower proportion of the total restatements filed during the period (due to reviewing fewer filings), less deterrence of earnings management, and higher information asymmetry. Overall, my study suggests that government-imposed resource constraints can motivate process improvements in priority areas of regulatory agencies, but only with tradeoffs on other dimensions.
Description
2025