Social media is widely used to create, disseminate, and consume information. Today, around seven in 10 U.S. adults use social media. Additionally, more than half of Americans at least occasionally obtain news through social media. In financial markets, investors use social media to express their opinions, and companies use it to disseminate information. Financial regulatory agencies are also increasingly adopting social media to connect with financial market participants. The SEC, for example, frequently tweets about its actions and activities. Yet, we know very little about whether the SEC’s use of social media influences the behavior of entities it regulates. Do regulated entities refrain from misdeeds once their regulators start tweeting? Could social media serve as a low-cost yet effective tool for financial regulators to combat misconduct?
In a recent paper, I investigate whether the SEC’s use of social media influences corporate and individual behavior. I exploit the staggered launch of SEC regional oﬃces’ Twitter accounts as a setting to study this question. This setting helps me address the issue that confounding events may influence observed results. The SEC has 11 regional offices across the U.S. These oﬃces are responsible for examinations and enforcement in their jurisdictions. As of October 2021, eight of these offices have started tweeting. Key players in financial markets follow the Twitter accounts of these offices. According to Brandwatch, nearly 30 percent of SEC regional offices’ followers are executives, and over 15 percent are lawyers.
Regional offices tweet about enforcement actions, especially those initiated by their staff and those not covered in the SEC press releases. They also tweet about investor education and community outreach activities. Tweets from regional offices make information about their enforcement activities more salient and more widely disseminated. In tweets, regional offices emphasize that they are directly involved in the enforcement activities or that the enforced entities are under their jurisdiction. They may also tweet multiple times about the same enforcement action, providing further information in an easy-to-understand format. For example, in October 2017, the New York regional oﬃce tweeted twice about Litigation Release No. 23970 – something not covered in the SEC press releases. In one tweet, the office highlighted that the offenders are “NY-based” (“SEC charges NY-based investment adviser with stealing $9 million from charity client”). In another tweet, the office highlighted that the “NY oﬃce” is the one that led the enforcement activity (“SEC exam by NY oﬃce led to today’s action charging adviser with stealing millions of dollars from charity”).
In my paper, I hypothesize that SEC regional oﬃces’ use of Twitter deters misconduct. Regional offices’ tweets make their enforcement activities more salient and more widely disseminated. This greater salience and wider dissemination may increase the regulated entities’ perception of misconduct-detection risk and their fear of public shaming, discouraging misconduct. Moreover, the salience and dissemination of information can mitigate the problem of limited stakeholder attention, increasing the accessibility of quality information provided to the public, thereby improving the quality under scrutiny.
My findings are three-fold. First, the presence of financial regulators on social media helps deter misconduct. After the associated SEC regional offices become active on social media, corporate insiders reduce their opportunistic trading, investment advisers receive fewer customer complaints, and corporate financial misreporting declines. Second, the salience and the dissemination of regional offices’ enforcement activities play a role in this process. The deterrence eﬀect of SEC regional oﬃces’ Twitter use is concentrated among oﬃces with more Twitter followers, ﬁrms with more retail investors, and advisers with more retail clients. I also find that investors react more strongly to enforcement actions after the enforcement firms’ regional offices start tweeting. Third, using data obtained through FOIA requests and collected from the SEC website, I do not observe any signiﬁcant changes in capacity, behavior, or enforcement activities of the regional oﬃces around the time they start using Twitter. Therefore, fundamental changes in these key aspects of regional offices are unlikely to explain the observed decline in misconduct.
Overall, my findings suggest that the use of social media by financial regulators helps deter misconduct. By making information more salient and widely disseminated, financial regulators help protect retail investors and clients, who have fewer resources and are more likely to suffer from limited attention. My results suggest that social media, with its broad reach and low cost, can help budget-constrained regulators achieve their regulatory goals.
This post comes to us from Jinjie Lin, a PhD student at Yale School of Management. It is based on her recent article, “Regulating via Social Media: Deterrence Eﬀects of the SEC’s Use of Twitter,” available here.