Eye off the Ball or Eye in the Sky? Sin Stocks and SEC Filing Reviews

• In Event: Regulation and Oversight

Abstract

Sin stock firms operating in potentially taboo industries, such as alcohol, gaming, and tobacco, experience many social biases including being excluded from investment funds, needing to pay their executives greater compensation, and needing to pay higher premiums to their external auditors. In this study, we examine whether social biases against sin stock firms extend to the regulatory setting. If social biases against sin stock firms persist in the regulatory environment, we would expect increased scrutiny from SEC staff in the form of higher likelihood of comment letter receipt, more rigorous comments, and more negative tone. In contrast, if SEC staff leverage the additional scrutiny these firms are already subjected to from investors and industry regulators, we would expect decreased scrutiny from SEC staff. Consistent with the latter, we observe that the SEC is less likely to issue comments on the annual report of sin stock firms, relative to non-sin stock firms. However, among those receiving a comment letter, there are no statistically significant differences in rigor or tone between sin stock firms and non-sin stock firms. Collectively, we interpret this evidence as consistent with reduced scrutiny on sin stock firms, relative to non-sin stock firms, during the earlier phases of the review process that allows for discretion in issuing a comment letter, but no significant difference in scrutiny in the later phases of the review process.

Authors

• Taylor Joo, New Mexico State University

• Lauren Dreher Cunningham, University of Tennessee