Working Paper
U.S. Congressional Committees and Corporate Financial
Misconduct
Mihir N. Mehta
Stephen M. Ross School of Business
University of Michigan
Wanli Zhao
Southern Illinois University
Ross School of Business Working Paper
Working Paper No. 1288
May 2016
This work cannot be used without the author's permission.
This paper can be downloaded without charge from the
Social Sciences Research Network Electronic Paper Collection:
http://ssrn.com/abstract=2668746
UNIVERSITY OF MICHIGAN
U.S. Congressional Committees and
Corporate Financial Misconduct
Mihir N. Mehta
University of Michigan
[email protected]
Wanli Zhao
Southern Illinois University
[email protected]
May 15, 2016
ABSTRACT
We document that firms with powerful representation on U.S. congressional committees
that oversee the Securities and Exchange Commission (SEC) are less likely to face
regulatory scrutiny for financial misconduct relative to other firms. An exogenous
decrease in firms’ powerful committee representation results in an increase in the
likelihood that those firms will subsequently face SEC enforcement actions. Furthermore,
conditional on receiving SEC enforcement action, the same firms also receive materially
smaller monetary penalties relative to other transgressing firms. Our findings appear to be
driven by firm-side efforts to supply higher quality financial reports rather than because
of political capture. In sum our study highlights a direct effect on financial reporting from
political representation on specific U.S. congressional committees.
Keywords: Political Economy; Corporate Governance; SEC Investigation; Senate
Committee on Banking, Housing, and Urban Affairs; House Committee on Financial
Services
JEL Codes: G34; M42; M48
__________________________
We appreciate comments and suggestions from Ron Anderson, Sudipta Basu, Sanjeev Bhojraj, Larry
Brown, Dane Christensen (discussant), Mark DeFond, Fritz Foley, Jere Francis, Jason Greene, Pratik Goel
(discussant), Rajkumar Iyer, Pete Lisowsky, Krish Menon, Greg Miller, Mike Minnis, Venky Nagar,
Lalitha Naveen, Tom Omer (discussant), Mark Peterson, Karthik Ramanna, David Reeb, Suraj Srinivasan,
K. R. Subramanyam, Luke Threinen, Rodrigo Verdi, Joe Weber, and seminar participants at the University
of Colorado, Massachusetts Institute of Technology, Southern Illinois University, Temple University,
University of Michigan, 2014 Indian School of Business Research Conference, the 2014 UIUC Audit
Research Symposium, and the AAA 2015 Annual Meeting. Zhao acknowledges financial support from
Southern Illinois University Carbondale. Some of this manuscript was completed while Mehta was visiting
MIT.
Electronic copy available at: http://ssrn.com/abstract=2668746
Electronic copy available at: http://ssrn.com/abstract=2668746
capability
“…the congressional committee that oversees the SEC that has a chokehold on the existence of the SEC,
that can block SEC funding, that can block SEC rulemaking, that can create a constant pressure in terms of
hearings and challenges and public statements, that can absolutely make life miserable for the commission.”
“[The politicians] kept the heat on me by telephone calls, by letters, by congressional hearings, and ultimately by
threatening the funding of the agency by threatening its very existence. I mean, we were at that point struggling [to
receive] the same compensation as other financial regulators… and certain members of this committee suggested to
me that getting that pay parity was out of the question while we were proceeding with this issue. So we were really
being held, well, an attempt was made to hold us captive.”(http://www.pbs.org/wgbh/pages/frontline
/shows/regulation/interviews/levitt.html)
Electronic copy available at: http://ssrn.com/abstract=2668746
decline
Total_Seniority
Total_Seniority
Total_Seniority
Seniority_Dum
Committee_Num
Enforcementi,t
Seniorityi,t
X
Controlsi,t
i,t
Enforcementi,t
i
t
Seniorityi,t
Total_Seniority Committee_Num
Seniority_Dum
Controlsi,t
Litigation Risk
Size
Leverage
MtB
Profit
Issuance
Stdev_Cashflow
Stdev_Sales
Oper_Cycle
FRQ1
FRQ1
Inst_Own)
Analyst_Following
Distance_to_SEC
Auditor_Share
Auditor_Tenure
Office_Size
GC_Dummy
Political_Connection
Politicial_Contribution
Lobby_SEC
unrelated
Enforcementi,t
Senior_Dropi,t
X
Controlsi,t
Enforcementi,t
t
i,t
i
t
t+
t+
t
Senior_Dropi,t
t
AAER
t-
t+
t,
Senior_Drop
Non-Senior_Drop
Controlsi,t
t-1
Political_Connection, Litigation Risk,
t+
t-
t+1
Distance_to_SEC.
t+
t+
AAER
Enforcement
t
Enforcement
less
Total_Seniority
Total_Seniority
Committee_Num
Seniority_Dum
non-senior
Non-Senior_Drop
addition
Senior_Drop
Senior_Drop_OtherComm
Non-Senior_Drop
Non-Senior_Drop_OtherComm
Senior_Drop_OtherComm
Non-Senior_Drop_OtherComm
Penalty$i,t
Seniorityi,t
X
Controlsi,t
i,t
Penalty$i,t
Controlsi,t
Seniorityi,t
Political_Connection Political_Contribution Lobby_SEC
IncomeInflation$ Litigation Risk Size
Leverage MtB Profit Inst_Own Analyst_Following
Distance_to_SEC
Total_Seniority Committee_Num
Total_Seniority
Political_Connection
Political_Contribution
Seniority_Dum
protection hypothesis
prevention hypothesis
FRQi,t
Senior_Dropi,t
X
Controlsi,t
i,t
FRQi,t
FRQ1 FRQ2,
Senior_Dropi,t
Senior_Drop
FRQ3
Senior_Drop
Non-
Senior Drop)
Senior_Drop_OtherComm).
Controlsi,t
Political_Contribution, Lobby_SEC Size Leverage MtB Profit
Issuance
Stdev_Cashflow,
Stdev_Sales,
Oper_Cycle,
Auditor_Share Auditor_Tenure Office_Size GC_Dummy,
Political_Connection, Litigation Risk,
FRQ1,
FRQ2,
FRQ3
Distance_to_SEC.
Inst_Own,
Analyst_Following,
Senior_Drop
.
“_Sub
“_NonSub
F
Quarterly Journal of Economics
Journal of Accounting Research
Journal of
Accounting & Economics
Journal of Accounting and Economics
Journal of Political Economy
Journal of Accounting &
Economics
Contemporary Accounting Research
Journal of Finance
Journal of Finance
Journal
of Law & Economics
Journal of Accounting Research
Journal of
Financial Economics
Quarterly Journal of Economics
American Journal of Political Science
American Economic
Review
Journal of Accounting
and Economics
Journal of Accounting Research
Journal of Accounting Research
The Accounting Review
Review of Financial
Regulation Studies
Journal of Accounting Research
Contemporary Accounting Research
Public Choice
Journal of
Accounting Research
Journal of Financial Economics
Journal of Accounting & Economics
Journal of Accounting and Economics
Quarterly Journal of Economics
Contemporary Accounting Research
Public Choice
Public Choice
Journal of Law & Economics
Journal of Accounting & Economics
Journal of
Applied Corporate Finance
Journal of Accounting
Research
Journal of Accounting Research
Journal of Politics
Bell Journal of Economic &
Management Science
The
CPA Journal
Journal of Financial Economics
Journal of Accounting and Economics
Journal of Law & Economics
Journal of Political Economy
Public
Review of Accounting Studies
Economics & Politics
Journal of Financial &
Quantitative Analysis
Dependent Variables:
Variables of Interest:
Control Variables:
t-
t
t.
t
t
t
t
FRQ1
TACC
REV
PPE
TACC
REV
PPE
TACC
PPE
REV
FRQ1
FRQ2
CFOt
CFOt
WC_ACCi,t
i
CA
CL
CASH
t CL
WC_ACC
t-
WC_ACC
CFOt
,i CFOi,ti CFOi,t
STDEBT
TAXES
t;
i,t
tt-
t-
,iCFOi,t+
CA
t
t
CASH
STDEBT
TAXES
t-
t
FRQ2
FRQ3
TAi,t
ASSETSi,t
SALESi,t
ARi,t
PPEi,t
i,t
TA
SALESi,t
ARi,t
PPEi,t
ASSETSi,t-
ROAi,t
t
FRQ3
i
t
t
FRQ1 FRQ2
FRQ3
Panel A: FRQ1
Panel B: FRQ2
Panel C: FRQ3
State-year Seniority Measures (n = 500)
Firm-year Seniority Measures (n = 17,017)
Other Variables (n = 17,017)
Enforcement
N
Enforcement
N
Enforcement
FRQ2
FRQ3
t
FRQ1
N
Enforcement
F-test: Subcommittee = Non-Subcommittee
State, Industry, Year, and Auditor Fixed Effects
N
3.88**
Yes
2.81*
Yes
2.75*
Yes
Enforcement
F-test: House Effect = Senate Effect
N
1.04
0.54
1.53