The Securities and Exchange Commission plays a crucial role as the watchdog of Wall Street by detecting financial misconduct and enforcing securities laws, but much of its investigative process has remained opaque to researchers and the public. In a new paper, we “watch the watchdogs” by building a geospatial database that allows us to uncover unprecedented insights into the SEC’s monitoring of public firms.

Anonymized Smartphone Data

We can shed light on the SEC’s investigative process by identifying smartphones that spend significant time during working hours at the SEC headquarters and regional offices. Data from users who agree to share their location with smartphone applications are aggregated and anonymized by commercial data vendors. We can then pair this data with other data to distinguish devices that are associated with the SEC from devices connected with other entities.  As the figure below illustrates – using Atlanta as an example – we can then track when these SEC associated devices visit the headquarters of publicly traded firms.

Figure 1: Atlanta SEC Device Visits to Firm Headquarters

Descriptive Findings of SEC monitoring

Using our nationwide database of SEC monitoring activity, we document four key descriptive findings:

1. The majority of SEC visits to company headquarters occur outside of formal investigations, suggesting there is substantial monitoring and information-gathering that is not captured in previously used SEC databases.
2. Firms that are larger and have a history of SEC enforcement actions against them are more frequently visited by SEC devices.
3. SEC visits often cluster within industries, consistent with the agency’s use of industry “sweeps” to shape market behavior.
4. SEC-associated devices frequently visit firms outside their home region, indicating monitoring is not strictly bound by geographic constraints.

SEC Visits, Stock Price Reactions, and Insider Trading

What happens to a firm’s stock price when the SEC visits? On average, it drops between 1.4 percent and 1.94 percent in the three months after a visit relative to the overall market. The drop is much greater when the visited firm is involved in an enforcement action, but we continue to see a drop for firms with no enforcement action against them. This price drop could be explained by several factors, including sophisticated investors obtaining news of the visit or the visit leading the firm to correct questionable accounting practices.

The presence of a regulator at firm headquarters presents a dilemma for officers who own shares in the company. There is a strong incentive to sell when the SEC visits, as the officer could avoid abnormal losses. However, the SEC visit could also prompt officers to shape up as it increases awareness that they are being scrutinized by the watchdog.

Our analysis finds evidence consistent with both of these incentives. On average, firm insiders are 16 percent less likely to sell shares in the firm in the two week surrounding a visit from an SEC-associated device. However, those that do sell avoid substantial losses. As Figure 2 shows, a firm insider who sells shares around a visit avoids three-month abnormal losses of nearly 5 percent. We also show that sales by firm officers and opportunistic insiders tend to be followed by the most substantial price drops.

Figure 2: Abnormal Stock Returns when Insiders Sell around an SEC Device Visit

Implications of Our Findings

Our study illuminates previously unexplored interactions between regulators and public firms, offering new insight into the SEC’s monitoring practices. Our use of geospatial data that exclude any information that could identify someone allows us to document that many interactions between the SEC and firms happen outside of formal investigations. The material impact of SEC visits raises questions about what constitutes material information and whether firm insiders should be restricted from trading around these visits. Collectively, our results further our understanding of how regulators interact with public firms and highlights the importance of watching the watchdogs.

This post comes to us from William Christopher Gerken at the University of Kentucky, Steven Irlbeck at the University of New Hampshire, Marcus Painter at Saint Louis University, and Guangli Zhang at Washington University in St. Louis. It is based on their recent paper, “Watching the Watchdogs: Tracking SEC Inquiries using Geolocation Data,” available here.