New research highlighted on the CLS Blue Sky Blog asks whether the public’s perception of the SEC influences engagement with U.S. financial markets and finds resoundingly that it does. The SEC itself monitors its public perception. The Office of Public Affairs monitors social media sentiment since negative posts could “disrupt the SEC’s regulatory agenda” and impact the public’s perception of the SEC. But little is known about how that public perception affects investor behavior.

The authors of a recent paper measured public sentiment by reviewing over 645,000 tweets that mentioned the SEC’s official Twitter (now X) account between 2012 and 2021, quantified the posts’ sentiments as positive, negative, or neutral toward the SEC and then aggregated these sentiments into a measure of public perception. Here’s what they found:

While it holds neutral views of the SEC about 58 percent of the time, the public maintains positive perceptions 29 percent of the time and negative perceptions 13 percent of the time. Moreover, perception shifts dramatically around major events: enforcement actions, regulatory changes, leadership transitions, and even broader crises like the COVID-19 pandemic.

Given Gallup poll Congressional approval ratings, that seems pretty good, no?

The researchers then compared changes in perception against trading activity and found that “when public perception of the SEC improves, retail trading increases; when it deteriorates, trading declines” with an economically meaningful magnitude.

– Retail investors account for roughly 20-30 percent of U.S. equity market volume – a substantial force in market liquidity and price discovery

– Retail trading volume is 3.6 percent higher during positive perception periods and 3.4 percent lower during negative periods

– The effects are strongest . . . among small firms and companies with low institutional ownership – precisely where SEC oversight is most important for investor protection

– When multiple social media users agree in their perception (showing low disagreement in sentiment), the effects are even more pronounced

It goes on to say that “SEC perception affects not just how much retail investors trade, but how they trade.”

During periods of positive SEC perception, retail investors rely more heavily on earnings information in their trading decisions. They’re more likely to buy stocks with positive earnings surprises and sell those with negative surprises. In other words, when the SEC is perceived favorably, retail investors appear to have greater confidence in the credibility of SEC-regulated disclosures.

It concludes with some implications for the SEC and this final thought.

Public perception matters – for trading volume, for information processing, and ultimately for the SEC’s ability to maintain fair and efficient markets. In the attention economy, perception isn’t just reality; it’s a force that shapes market outcomes.

I guess Glinda was right — it’s “about popular” — but I must “protest” with the remainder of this song. It’s also about “aptitude.”

– Meredith Ervine