Conference Agenda

In policing terms, a broken windows approach asserts that detecting and prosecuting minor violations will deter more severe crimes. I study the effectiveness of a broken windows approach to securities enforcement. Using SEC Chair Mary Jo White’s policies during 2013-2016, I find evidence consistent with broken windows securities enforcement policies deterring accounting fraud. This result is robust to several alternative research designs and reverses during the subsequent SEC administration starting in 2017. I also provide evidence for a deterrent mechanism that is unique to the securities enforcement context, whereby broken windows policies incentivize internal control improvements. Finally, I find that executing a broken windows policy constrains enforcement resources, resulting in tradeoffs in the investigations the SEC pursues.

Securities law prioritizes transparency through mandatory public disclosures, while banking law emphasizes opacity by prohibiting disclosure of confidential supervisory information (CSI). This conflict raises a fundamental question: is CSI material to investors? Regulators have implicitly assumed it is not, but that position has never been empirically tested. We test market reactions using a novel dataset of unexpected CSI leaks at publicly traded bank holding companies. We find statistically and economically significant abnormal stock returns and changes in implied credit default swap spreads on days when CSI is leaked, demonstrating that some CSI is indeed material to investors. These findings challenge the regulatory stance of categorical immateriality and expose unresolved tensions between securities and banking laws. They also carry implications for disclosure compliance, insider trading, due diligence in financial transactions, and the broader policy tradeoffs between investor transparency and financial stability.