Scandal Enforcement at the SEC: The Arc of the Option Backdating Investigations

We study the Securities and Exchange Commission's (SEC) enforcement decisions in the context of the highly salient back-dating scandal. We find that (1) the SEC shifted its mix of investigations significantly toward backdating and away from other accounting issues; (2) event studies of stock market reactions to the initial disclosure of backdating investigations shows that those reactions declined over our sample period; (3) later backdating investigations are less likely to target individuals and be accompanied by a parallel criminal investigation; (4) later investigations were more likely to be terminated or produce no monetary penalties; and (5) the magnitude of the option backdating accounting errors diminished over time relative to other accounting errors that drew SEC scrutiny. Although we cannot directly test whether the SEC substituted toward lower-stake (but more salient) cases, the evidence presented here strongly suggests that the agency did so.