The Role of Academic Research in SEC Rulemaking: Evidence from Business Roundtable v. SEC

By | June 18, 2021

In our paper, “The Role of Academic Research in SEC Rulemaking: Evidence from Business Roundtable v. SEC,” we examine the Securities and Exchange Commission’s (SEC) use of academic research in its rulemaking. We focus on the DC District Court’s decision in Business Roundtable v. SEC (2011) to strike down the proxy-access rule, which was promulgated by the SEC pursuant to the Dodd-Frank Act (2010), because of its insufficient cost-benefit analysis connected to its creation. We find the use of academic research increased after the rule was struck down. According to the law literature, this court case represents an important change in precedent leading to a new higher standard in the discussion of academic research found in SEC rules. This change in precedent creates interesting variation to examine the effects of increased consumption of academic research in the regulatory process.

We were able to come to these conclusions after analyzing the purpose of each academic citation in the SEC’s proposed and final rule documents. We examine 176 proposed and 181 final rule documents released from 2007 to 2017, and we hand-collect 879 unique academic papers cited in these documents.

We also show that the number of papers highlighting the costs of the regulation increased after the court case, and the increase is most concentrated in proposed rules. This finding suggests the SEC at least attempted to create a more even discussion of the literature. According to our survey of academics, 60% of survey participants felt benefits are at least slightly over-discussed relative to costs in the SEC’s cost-benefit analysis. The shift to a larger discussion of the costs of regulation after Business Roundtable might then be seen as an improvement in evidence-based regulation.

By analyzing 18,806 comment letters received on 105 proposed regulations from 2008 to 2016, we find that the change in citations is associated with a reduction in the number of negative comment letters in the post-Business Roundtable period. This finding is in line with what we would predict according to the public interest theory. Coates (2015) suggested the Judge’s ruling in Business Roundtable was intended to decrease the amount of future regulation. Although we do not have enough evidence to causally link the decrease in rules in the post-period to Business Roundtable, a decrease in the number of rules proposed and negative comments around the rules might be interpreted as the SEC no longer choosing to pursue controversial regulation. However, further research into the cause of the decrease in rules during the post-period would be necessary.

Two important assumptions of our analysis are that SEC staff (or at least the economists in charge of economic analysis) understand the research and that when they cite it, they are doing so in an accurate and substantive manner. A captured regulator could intentionally describe research inaccurately or meaninglessly to make the rule look favorable to the public although it is actually designed for the dominant interest groups. To validate these assumptions, we conduct two surveys: one for academics whose research was cited in the SEC’s proposed rules and the other for the general academic community.

In the first survey, we present the authors with the SEC’s description of their research and ask them to rate the description’s accuracy and substantiveness (i.e., the degree of meaningfulness and/or thoroughness). We find that these authors describe the SEC as “completely or mostly accurate” more often (67%) than “completely inaccurate or mostly inaccurate” (11%). The average substantiveness rating is slightly lower than the accuracy rating, with 51% responding “very or fairly substantive” versus 25% responding “completely or fairly insubstantial.” Taken together, these results are more consistent with the view that the SEC uses academic research in an accurate and substantive way rather than in a captured way. We also learn that SEC staff do not seem to be contacting authors of the cited papers. If the SEC might want to improve its accuracy or substantiveness, room remains for increased dialogue. We find academics whose research was not cited by the SEC view the SEC’s comments as less accurate than those whose work was cited by the SEC.

Our paper contributes to the literature studying cost-benefit analysis in regulation. Most of the papers examining this topic have been anecdotal. Prior research, such as White (2015) or Schipper (2010), gives powerful insights from an individual’s perspective but does not provide large-sample evidence on the practices of regulators. Although some research has been done in other fields, such as healthcare, the relatively smaller fields of academic accounting and finance might not be able to inform regulators in the same fashion as a large field such as medicine.

Although our paper is mostly descriptive in nature, we believe our findings can help future researchers better understand how their research can affect other regulators, by providing a benchmark for meaningful comparisons. Even though prior research has examined the research output of employees of the Federal Reserve (Jansen 1991; White 2005), we still do not know much about the other regulators’ consumption and production of research. We focus on the SEC because of its importance in disclosure research and the unique setting of the Business Roundtable v. SEC decision. However, other important regulators for accounting research exist, where similar analysis could be done. Future analysis is warranted because different regulators have different goals and objectives, which can affect their demand for different types of research. The SEC’s mandate is to promote investor welfare and not consumer or public welfare except through market effects. For example, the SEC’s economic analyses of JOBS Act rules do not measure the impact of the rules on the labor market, whereas regulators such as the Federal Reserve, which has a much broader objective, might not have such a narrow focus on the types of research that should be considered regarding regulatory changes.

Our paper is intended to inform discussions about research infrastructure. We add to papers such as DeFond (2016), who discusses publication acceptance rates, by reporting survey respondents’ self-reported rates of publication and views on rates of publication. Additionally, our paper highlights the similarities and differences in the taste functions of journal editors and regulators. Some correlation seems to exist because the SEC cites high-impact-factor journals much more than low-impact-factor journals. However, our results also suggest some differences. For example, in our tabulation of papers most cited by the SEC, theory/analytical papers seem to be overrepresented relative to their occurrence in the field of accounting and finance. These differences may reflect the greater diversity of research that draws from multiple sources of pedagogical and informational demand for research besides that of regulators. While papers such as Rogers et al. (2017) may influence the SEC’s policies directly, most research tries to inform a variety of constituents such as investors, managers, auditors, and so on.

Future research still needs to investigate whether and how academics have changed in response to the SEC’s use of their research. We document changes in the SEC’s citations as a result of a natural shock to the equilibrium. We try to provide evidence that increased SEC demand for research shifted total SEC citations, but part of the observed increase in citations might have been caused by a shift in the supply of research caused by the increased demand.

We hope this paper sparks conversations among academics across the related business fields (accounting, finance, and economics) about the role of academic research in regulation. A research paper’s contribution is difficult to measure. While assessing the number of downloads or citations by other papers among academics is common, creating real-world changes could be academics’ ultimate goal. Although regulatory change is just one form of a real-world impact and the SEC is just one regulatory body, this paper still seeks to help expand our discussion of contribution. Furthermore, this paper should help academics better understand how the SEC has consumed and used academic research, so we can better participate in the conversation about how academic research can help improve the regulation design and contribute to society.

Rachel Geoffroy is an Assistant Professor at Ohio State University – Department of Accounting & Management Information Systems

Heemin Lee is an Assistant Professor of Accounting at the Zicklin School of Business at Baruch College

This post is adapted from their paper, “The Role of Academic Research in SEC Rulemaking: Evidence from Business Roundtable v. SEC, available on SSRN.

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