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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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  1. Peltzman, Sam, 1981. "The Effects of FTC Advertising Regulation," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 403-448, December.
  2. A. Mitchell Polinsky & Steven Shavell, 2009. "Public Enforcement of Law," Chapters,in: Criminal Law and Economics, chapter 1 Edward Elgar Publishing.
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  6. repec:hrv:faseco:30728046 is not listed on IDEAS
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  9. John Armour & Simon Deakin & Prabirjit Sarkar & Mathias Siems & Ajit Singh, 2007. "Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis," Working Papers wp358, Centre for Business Research, University of Cambridge.
  10. Karpoff, Jonathan M. & Lee, D. Scott & Martin, Gerald S., 2008. "The Cost to Firms of Cooking the Books," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 581-611, September.
  11. Sanjai Bhagat & Roberta Romano, 2002. "Event Studies and the Law: Part I: Technique and Corporate Litigation," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 141-168, January.
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  16. Sanjai Bhagat & Roberta Romano, 2001. "Event Studies and the Law - Part I: Technique and Corporate Litigation," Yale School of Management Working Papers amz2475, Yale School of Management, revised 01 Jan 2002.
  17. 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 527-573, April.
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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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