Regulatory actions and reputation spillovers: investor reactions to Foreign Corrupt Practices Act violations

This study examines reputational penalty spillovers in the context of multinational enterprises’ (MNE) Foreign Corrupt Practices Act (FCPA) violations. We focus on investor reactions to unaccused industry bystander MNEs upon two FCPA regulatory events: investigation and enforcement. Expanding on the notion of categorization, we theorize that unaccused bystander MNEs would experience reputation spillover penalties in the investigation stage due to investors’ similarity-based categorization. In the enforcement stage, investors focus more on individual firm traits and no longer rely on similarity-based categorization in their evaluation, resulting in penalties isolated to the focal MNE and competitive benefits to bystander MNEs. Additionally, due to causal-based categorization, these investor reactions would be further influenced by whether the bystander MNEs had subsidiaries in the host country where the bribery had occurred, as well as the level of host-country corruption. We test these arguments using event study methods involving US-listed bystander MNEs upon 190 FCPA regulatory events from 1998 to 2021 and find support for most of our hypotheses. This study provides more nuanced theoretical underpinnings for reputation spillovers and highlights social evaluation aspects in studying MNE corruption and other socially irresponsible practices.