Sin Stocks and SEC Filing Reviews

Abstract

In this study, we examine whether and how SEC regulators adjust their oversight processes when there are conflicting risks, specifically among sin stock firms operating in potentially controversial industries, such as alcohol, gaming, and tobacco. On the one hand, we would expect increased scrutiny from SEC staff if they believe that companies willing to offer these sin-related products and services are more likely to skirt SEC disclosure guidelines. On the other hand, if the SEC staff leverage the additional scrutiny these firms are already subjected to from investors, industry regulators, and auditors, 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. Among those receiving a comment letter, there are no statistically significant differences in rigor or tone, on average. In additional analyses, we find limited evidence that specific reviewer characteristics are associated with differential treatment for sin stock firms in terms of rigor. Finally, we find that among firms that did not receive a comment letter, sin stock firms are less likely to restate their financial statements in the future. Collectively, we interpret this evidence as the SEC efficiently reducing scrutiny on sin stock firms, relative to non-sin stock firms, during the earlier phases of the review process, with minimal differences in the later phases of the review process.