Regulatory Enforcement Mechanisms Influencing Corporate Financial Reporting Behavi

Abstract

This research investigates the differential impacts of formal versus informal regulatory
enforcement mechanisms on corporate financial reporting behavior, proposing a novel theoretical framework that integrates institutional theory with behavioral economics. While
existing literature predominantly focuses on formal sanctions, this study uniquely examines how informal mechanisms—including regulatory reputation, peer benchmarking
disclosures, and public enforcement narratives—shape reporting decisions through psychological and social channels. We develop an original methodology combining computational text analysis of regulatory communications with a quasi-experimental design using
a proprietary dataset of enforcement actions from 1998 to 2004. Our analysis reveals
that informal mechanisms account for approximately 40% of the variance in reporting
quality improvements following enforcement actions, a substantially larger effect than
previously documented. Furthermore, we identify a counterintuitive ’deterrence saturation’ point beyond which increased formal penalties yield diminishing returns, while
informal mechanisms continue to exert influence. The findings challenge conventional
enforcement models and offer a more nuanced understanding of regulatory efficacy. This
research contributes to the accounting, regulatory, and behavioral literature by providing
a comprehensive framework for analyzing enforcement ecosystems and offering evidencebased recommendations for optimizing regulatory strategy in evolving financial markets.