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Regulatory Sanctions and Reputational Damage in Financial Markets

Author Info

Listed author(s):
  • 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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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
Handle: RePEc:cpr:ceprdp:8058
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Keywords: Corporate Law; Enforcement; Regulation; Reputation;

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

References listed on IDEAS
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  22. Coffee, John C., Jr., 2007. "Law and the Market: The Impact of Enforcement," Working Papers 07-3, University of Pennsylvania, Wharton School, Weiss Center.
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Cited by:

  1. Xi Li & Amir N. Licht & Christopher Poliquin & Jordan I. Siegel, 2015. "What Makes the Bonding Stick? A Natural Experiment Involving the U.S. Supreme Court and Cross-Listed Firms," HKUST IEMS Working Paper Series 2015-19, HKUST Institute for Emerging Market Studies, revised Mar 2015.
  2. Edward M. Iacobucci, 2014. "On the Interaction between Legal and Reputational Sanctions," The Journal of Legal Studies, University of Chicago Press, vol. 43(1), pages 189-207.
  3. repec:dau:papers:123456789/15152 is not listed on IDEAS

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