SEC scrutiny and corporate risk-taking

We examine whether heightened SEC scrutiny of financial reporting affects corporate risk-taking. Because managers are risk-averse, tightened regulatory oversight could increase risk-taking by strengthening accounting's governance role, or reduce it by constraining managers' ability to shield themselves from risky outcomes through earnings management. In 2007, the SEC elevated six district offices to the regional level, expanding their authority and enforcement resources. Using this reorganization in a difference-in-differences design, we find that treatment firms in the jurisdictions of the newly elevated offices experience declines in idiosyncratic stock return volatility, R&D expenditures, and innovation relative to control firms, consistent with reduced risk-taking. Treatment firms also exhibit lower earnings management. The effects of heightened scrutiny are concentrated among firms where managers face greater career concerns and where earnings management declines most. Overall, our results suggest that increased regulatory scrutiny can dampen corporate risk-taking by constraining managerial reporting discretion and intensifying risk-related agency frictions.