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The Profitability of Price Fixing: Evidence from Stock Market Reaction to Federal Indictments

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  • Bosch, Jean-Claude
  • Eckard, E Woodrow, Jr

Abstract

The authors estimate the profitability of price fixing by examining the stock price reaction to federal indictments for 127 firms during 1962-1980. They hypothesize that the reaction is composed of expected legal costs, lost monopoly profits, and/or various negative "market signal" effects. The mean abnormal return over the WSJ indictment announcement date and the day before is a statistically significant --1.08%. This corresponds to a total value loss of $2.18 billion ($1982), of which only about 13% can be attributed to various legal costs (e.g., fines and damages). The $1.89 billion residual might be, in all or part, the present value of monopoly profits lost because of conspiracy dissolution. They test this and other possible explanations, and on balance find support for the lost monopoly profit interpretation. Copyright 1991 by MIT Press.

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  • Bosch, Jean-Claude & Eckard, E Woodrow, Jr, 1991. "The Profitability of Price Fixing: Evidence from Stock Market Reaction to Federal Indictments," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 309-317, May.
  • Handle: RePEc:tpr:restat:v:73:y:1991:i:2:p:309-17
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