Study: SEC Tweeting Cuts Misconduct

Let it never be said that arcane bits of academic research have no relevance to corporate compliance! A grad student at Yale has found that regional SEC offices’ robust use of Twitter correlates to reduced insider trading, customer complaints against investment advisers, and financial misreporting.

I came across this study last week — on Twitter, naturally. Jinjie Lin, an accounting PhD student at Yale School of Management (“I am on the 2021-2022 job market,” her website says), studied the tweeting patterns of the 11 regional offices the Securities and Exchange Commission maintains around the country; and then compared that activity against various benchmarks of enforcement, misconduct, and consumer complaints in those same regions. 

Her conclusion: yes, SEC offices that tweet more often really do see fewer incidents of misconduct in their local regions, compared to those boring and un-hip regional offices that don’t. 

So if you compliance officers want an edge in improving ethical conduct among your workforce, all you need to do is relocate the business to a region where the local SEC office is run by a Twitter addict. Every bit helps, after all.

Anyway, back to Lin and her fascinating contribution to corporate governance. Her hypothesis was that the more robust an SEC office’s Twitter activity was, the more those tweets would be noticed by the local legal, financial, and investment professionals following those offices on Twitter — and since many of those SEC tweets tout enforcement actions, that should spook those local populations into better behavior, right? 

Yes! Specifically, Lin found that:

• The opening of a Twitter account by a regional office reduces opportunistic trades (sells) by insiders of the firms under that office’s jurisdiction by approximately 5 percent;
• The use of Twitter by regional offices reduces the likelihood of customer complaints against advisers under that office’s jurisdiction by 0.53 percent;
• A regional office’s use of Twitter reduces the probability of financial misreporting by 0.49 percent. 

Lin also found that the deterrent effect was stronger for regional offices with more Twitter followers, which makes sense. 

Even more interesting: the deterrent effect for complaints about investment advisers was concentrated among advisers with more retail clients (as opposed to institutional clients). The same was true for deterrent against financial misreporting, too: the effect was concentrated among companies with more retail investors. 

Why? Lin’s theory is that as SEC regional offices develop more robust Twitter habits and pick up more followers, retail investors are more likely to notice the misconduct that those SEC offices announce. So managers at advisory firms and companies with large retail customer bases are more sensitive to the risk of public shaming, and therefore try harder not to do something dumb that gets them mentioned on Twitter. 

And which SEC offices have the most robust Twitter feeds, you ask? Lin also compiled the following nifty table:

New York has the most followers (no surprise there), although it tweets far less often than San Francisco, Boston, or Fort Worth. Chicago looks particularly lame, considering the office has a substantial number of companies and advisory firms in its region. 

The Enforcement Division has its own Twitter feed too, although that one looks like a snoozer compared to the regional offices. Once upon a time the SEC’s Division of Economic Research and Analysis even had a Twitter game that was downright funny, although it too has gone full boring lately.

What can the rest of us do with Lin’s conclusions? She suggests that other regulators could develop their own Twitter feeds and extend the deterrent effect in their domains, too. “Overall, this study suggests that the use of social media by financial regulators helps deter misconduct… My findings suggest that social media, with its broad reach and low cost, could help budget-constrained regulators achieve their goals,” she writes. 

That’s true, and I hope other regulators do follow suit. I just enjoy the wide world of academic research, and all the odd ways it can discover something interesting. 

Now I’m off to update my follow list.