U.S. Congressional Committees and Corporate Financial Misconduct

Abstract

We document that firms with powerful political representation on the two U.S. congressional committees that oversee the Securities and Exchange Commission (SEC) are less likely to face regulatory enforcement against corporate financial misconduct relative to other firms. Conditional on receiving an SEC enforcement action, the same firms also receive materially smaller monetary penalties. We establish causality using plausibly exogenous shocks to firms’ political representation on these congressional committees based on committee turnover cases and firm headquarters location changes. Our findings are consistent with politician concern about voters’ adverse reactions to the effects of financial misconduct by local firms: for politicians serving on one of these two committees and running for reelection, an SEC enforcement action against a constituent firm is negatively associated with the likelihood that the politician is subsequently reelected.