Regulatory capture and undue influence from political spending are always a concern, but specific evidence of wrongdoing is hard to come by, and most accusations come from a vague sense that some firms (or industries) are getting a better deal than others. In her recent paper Political connections and SEC enforcement, London Business School professor of accounting Maria M. Correia shows that there is a strong statistical correlation between increased PAC and lobbying spending and softer Securities and Exchange Commission enforcement.
“Politically connected firms are on average less likely to be involved in an SEC enforcement action and face lower penalties if they are prosecuted by the SEC,” she writes.
PAC contributions and lobbying can cut enforcement actions in half
Correia focuses on a subset of cases involving company restatements, which sometimes trigger an initial investigation. The SEC doesn’t disclose an investigation unless it results in an enforcement action (though companies make disclose them at their discretion), so she compares the probability that a restatement results in an enforcement action to political spending and connections to the SEC through revolving door lobbyists (former SEC staffers who now work for a lobbying firm or vice versa).
She controls for firm size, book-to-market ratio, leverage, age, proxies for visibility including analyst coverage, and proximity to SEC offices (previous researchers have shown that the SEC is more likely to investigate companies that are headquartered nearby). The sample was also broken up for major regulatory changes (eg Sarbanes Oaxley) that could affect how the SEC approaches enforcement decisions.
“A $1 million increase in PAC contributions made over the previous five years is estimated to reduce the probability of an enforcement action for the restatement sample from 8.58% to 3.43%,” Correia writes, and “an increase of $4 million in long-term lobbying by a restatement firm is estimated to reduce the probability of enforcement from 8.12% to 4.01%.”
Correia speculates that the SEC has more leads than it can follow up on at any one time, and that it is using this discretion to avoid picking fights. As you would expect, not all political contributions have the same impact. Political connections are strongly correlated to avoiding enforcement if it’s longstanding (five years or more) or if the politician sits on a relevant committee. Surprisingly, direct lobbying of the SEC was the only measure in the study that didn’t reduce the probability of enforcement action.
Political spending reduces fees, makes O&D bar less likely
To compare the size of the penalties, Correia controlled for the same variables listed above as well as the size of the drop in market cap due to the restatement, the presence of fraud or insider trading, and proxies for complexity that could undermine investor confidence.
“A $100,000 increase in political spending over the last five years is associated with an 11% decrease in monetary penalties,” she writes, and “an additional $100,000 in PAC contributions reduces the probability of an O&D bar by 12.9%.”
Correia isn’t trying to draw direct lines between political spending and reduced penalties in specific instances, but her research backs up what most of us suspect – that money and influence affect how companies are treated by regulators.