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Does the Freedom of Information Act Foil the Securities and Exchange Commission’s Intent to Keep Investigations Confidential?

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Listed:
  • Braiden Coleman

    (Department of Accounting, Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Kenneth Merkley

    (Department of Accounting, Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Brian Miller

    (Department of Accounting, Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Joseph Pacelli

    (Department of Accounting, Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

Abstract

The Securities and Exchange Commission (SEC) has a long-standing policy to keep formal investigations confidential. In this study, we examine the extent to which compliance with the Freedom of Information Act (FOIA) provides investors with information about ongoing SEC investigations. We exploit a unique empirical setting whereby the SEC denies FOIA requests because of ongoing enforcement proceedings (hereafter, exemption denials). We find that exemption denials predict a substantial number of ongoing and future SEC investigations. Exemption denials are also associated with significant negative future abnormal returns, which is consistent with exemption denials providing a noisy public signal that allows certain sophisticated investors to earn future abnormal returns. Overall, our findings suggest that information transparency laws such as FOIA have the potential to limit the SEC’s ability to maintain effective and confidential investigations.

Suggested Citation

  • Braiden Coleman & Kenneth Merkley & Brian Miller & Joseph Pacelli, 2021. "Does the Freedom of Information Act Foil the Securities and Exchange Commission’s Intent to Keep Investigations Confidential?," Management Science, INFORMS, vol. 67(6), pages 3419-3428, June.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:6:p:3419-3428
    DOI: 10.1287/mnsc.2020.3625
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    References listed on IDEAS

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    Cited by:

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    2. Holzman, Eric R. & Marshall, Nathan T. & Schmidt, Brent A., 2024. "When are firms on the hot seat? An analysis of SEC investigation preferences," Journal of Accounting and Economics, Elsevier, vol. 77(1).

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