Contrary to previous research supporting the belief that public companies with political ties get less scrutiny from the Securities and Exchange Commission, well-connected outfits are probed more deeply, a new study finds.
The political connections companies have “positively predict” reviews of comment letters “and substantive characteristics of such reviews, including the number of issues evaluated and the seniority of SEC staff involved,” the study’s authors contend.
Previous theories have have hypothesized that a company’s political ties make enforcement actions against the company less likely and make penalties lighter. That’s based on the notion that politicians “can interfere with SEC investigations, use budget allocations to control the SEC, or affect SEC officials’ careers,” according to the study. To investigate the relation between firm political connectedness and comment letter reviews, the study’s authors obtained all comment letters from the Audit Analytics database for 2005-2012 and retained those related to firms’ 10- K filings.
In the study, “Is the SEC Captured? Evidence from Comment-Letter Reviews,” the authors define politically connected companies as “firms that have either lobbied the SEC directly or are top contributors to legislators serving on SEC oversight committees.”
Politically connected companies “are significantly more likely” to receive SEC comment letter reviews, according to the researcher, Jonas Heese, an assistant professor of business administration at Harvard Business School; Mozaffar Khan, an accounting professor at the University of Minnesota’s Carlson School of Management; and Karthik Ramanna, a professor of business and public policy at Oxford University.
The authors pay special attention to SEC comment letters. The commission expresses questions and concerns about companies’ compliance with disclosure and accounting by issuing comment letters that require company response and remediation.
Conducted by the SEC’s division of corporation finance, the comment letter review process covers a great deal of regulatory ground. Between 20% and 40% of U.S. listed firms have gotten a comment letter in each year between 2005 and 2012, the years covered by the study.
Why does the SEC’s corporate finance unit tend to scrutinize politically connected companies more than it does unconnected firms? The authors think the most likely answer doesn’t require “an anti-political vendetta” on the part of the regulators.
Instead, political connectedness may simply be a practical way for regulators to unearth issues that they want to review before issuing comment letters, the researchers suggest. The author’s tests suggest that the SEC’s corporate finance division may see a company’s political connectedness “as a distinct risk indicator,” according the paper.
Proposing “a more nuanced relation” between corporations’ political links and SEC oversight, the researchers suggest that industry’s influence on the commission, “if it exists, may be less blatant or pronounced than previously thought.”