Regulatory Transparency and the Alignment of Private and Public Enforcement

We propose and find that enhanced regulatory transparency facilitates alignment between private and public enforcement. Utilizing the SEC’s 2004 decision to publicly disclose its comment letters, we explore the actions of a public enforcer (the SEC) and a private enforcer (shareholder litigants). The two parties’ enforcement targets are more aligned in the post-public-disclosure period. The increased alignment is attributable to two channels. First, SEC’s actions are subject to greater public scrutiny, enhancing regulator incentives and reducing regulatory capture. Second, shareholder plaintiffs gain information previously accessible only by regulators, enabling litigants to identify cases with “merit,” reducing nuisance suits and earning larger settlements.