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Enforcement Waves and Spillovers

Author

Listed:
  • Hae Mi Choi

    (Loyola University of Chicago, Chicago, Illinois 60611)

  • Jonathan M. Karpoff

    (University of Washington, Seattle, Washington 98195)

  • Xiaoxia Lou

    (University of Delaware, Newark, Delaware 19716)

  • Gerald S. Martin

    (American University, Washington, District of Columbia 20016)

Abstract

We document that regulatory enforcement actions for financial misrepresentation cluster in industry-specific waves and that wave-related enforcement has information spillovers on industry peer firms. Waves and spillovers have significant effects on share prices. Early-wave target firms have the largest short-run losses in share values and the largest information spillovers on industry peer firms. Late-wave targets’ short-run losses are smaller, but not because they involve less costly instances of misconduct. Rather, late-wave targets are subject to more information spillovers from earlier in the wave. These results indicate that prices incorporate changes in the likelihood that a firm will face wave-related enforcement action for financial misconduct. Short-window share-price losses understate the total share-price impact, particularly for firms whose financial misrepresentation is revealed late in an enforcement wave.

Suggested Citation

  • Hae Mi Choi & Jonathan M. Karpoff & Xiaoxia Lou & Gerald S. Martin, 2024. "Enforcement Waves and Spillovers," Management Science, INFORMS, vol. 70(2), pages 834-859, February.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:2:p:834-859
    DOI: 10.1287/mnsc.2023.4711
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