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Regulatory Sanctions and Reputational Damage in Financial Markets

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  • Armour, John
  • Mayer, Colin
  • Polo, Andrea

Abstract

We 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8058.

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Date of creation: Oct 2010
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Handle: RePEc:cpr:ceprdp:8058

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Related research

Keywords: Corporate Law; Enforcement; Regulation; Reputation;

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References

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  1. 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.
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  14. 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.
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