Regulatory Sanctions and Reputational Damage in Financial Markets
AbstractWe study the impact of the announcement of enforcement of financial and securities regulation by the UK’s Financial Services Authority and London Stock Exchange on the market price of penalized firms. Since these agencies do not announce enforcement until a penalty is levied, their actions provide a uniquely clean dataset on which to examine reputational effects. We find that reputational sanctions are very real: their stock price impact is on average ten times larger than the financial penalties imposed. Furthermore, reputational losses are confined to misconduct that directly affects parties who trade with the firm (such as customers and investors). The announcement of a fine for wrongdoing that harms third parties has, if anything, a weakly positive effect on stock prices. Our results have significant implications for understanding both corporate reputation and regulatory policy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8058.
Date of creation: Oct 2010
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gregg A. Jarrell & Sam Peltzman, 1984.
"The Impact of Product Recalls on the Wealth of Sellers,"
University of Chicago - George G. Stigler Center for Study of Economy and State
33, Chicago - Center for Study of Economy and State.
- Jarrell, Gregg & Peltzman, Sam, 1985. "The Impact of Product Recalls on the Wealth of Sellers," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 512-36, June.
- Peltzman, Sam, 1981.
"The Effects of FTC Advertising Regulation,"
Journal of Law and Economics,
University of Chicago Press, vol. 24(3), pages 403-48, December.
- Sam Peltzman, 1980. "The Effects of FTC Advertising Regulation," University of Chicago - George G. Stigler Center for Study of Economy and State 19, Chicago - Center for Study of Economy and State.
- Karpoff, Jonathan M & Lott, John R, Jr & Wehrly, Eric W, 2005. "The Reputational Penalties for Environmental Violations: Empirical Evidence," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 653-75, October.
- John Armour & Simon Deakin & Prabirjit Sarkar & Mathias Siems & Ajit Singh, 2008.
"Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis,"
WEF Working Papers
0041, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
- Armour, John & Deakin, Simon & Sarkar, Prabirjit & Siems, Mathias & Singh, Ajit, 2007. "Shareholder protection and stockmarket development: an empirical test of the legal origins hypothesis," MPRA Paper 39055, University Library of Munich, Germany.
- John Armour & Simon Deakin & Prabirjit Sarkar & Mathias Siems & Ajit Singh, 2007. "Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis," ESRC Centre for Business Research - Working Papers wp358, ESRC Centre for Business Research.
- Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
- Murphy, Deborah L. & Shrieves, Ronald E. & Tibbs, Samuel L., 2009. "Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 55-83, February.
- Alexander, Cindy R, 1999. "On the Nature of the Reputational Penalty for Corporate Crime: Evidence," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 489-526, April.
- Coffee, John C., Jr., 2007. "Law and the Market: The Impact of Enforcement," Working Papers 07-3, University of Pennsylvania, Wharton School, Weiss Center.
- Sanjai Bhagat & Roberta Romano, 2001. "Event Studies and the Law - Part I: Technique and Corporate Litigation," Yale School of Management Working Papers amz2475, Yale School of Management, revised 01 Jan 2002.
- Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
- Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
- Karpoff, Jonathan M & Lott, John R, Jr, 1993. "The Reputational Penalty Firms Bear from Committing Criminal Fraud," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 757-802, October.
- Shleifer, Andrei & Vishny, Robert W, 1997.
" A Survey of Corporate Governance,"
Journal of Finance,
American Finance Association, vol. 52(2), pages 737-83, June.
- Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
- Andrei Shleifer & Robert W. Vishny, 1995. "A Survey of Corporate Governance," Harvard Institute of Economic Research Working Papers 1741, Harvard - Institute of Economic Research.
- Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
- Karpoff, Jonathan M. & Lee, D. Scott & Martin, Gerald S., 2008. "The Cost to Firms of Cooking the Books," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 581-611, September.
- Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-59, September.
- Mitchell, Mark L & Maloney, Michael T, 1989. "Crisis in the Cockpit? The Role of Market Forces in Promoting Air Travel Safety," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages 329-55, October.
- Karpoff, Jonathan M & Lott, John R, Jr, 1999. "On the Determinants and Importance of Punitive Damage Awards," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 527-73, April.
- Sanjai Bhagat & Roberta Romano, 2002. "Event Studies and the Law: Part I: Technique and Corporate Litigation," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 141-168, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.