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Corporate Scandals and Regulation

Author

Listed:
  • Luzi Hail

    (The Wharton School, University of Pennsylvania)

  • Ahmed Tahoun

    (London Business School)

  • Clare Wang

    (Tippie College of Business, University of Iowa)

Abstract

Are regulatory interventions delayed reactions to market failures or can regulators proactively pre-empt corporate misbehavior? From a public interest view, we would expect `effective` regulation to ex ante mitigate agency conflicts between corporate insiders and outsiders, and prevent corporate misbehavior from occurring or quickly rectify transgressions. However, regulators are also self-interested and may be captured, uninformed, or ideological, and become less effective as a result. In this registered report, we develop a historical time series of corporate (accounting) scandals and (accounting) regulations for a panel of 26 countries from 1800 to 2015. An analysis of the lead-lag relations at both the global and individual country level yields the following insights: (i) Corporate scandals are an antecedent to regulation over long stretches of time, suggesting that regulators are typically less flexible and informed than firms. (ii) Regulation is positively related to the incidence of future scandals, suggesting that regulators are not fully effective, that explicit rules are required to identify scandalous corporate actions, or that new regulations have unintended consequences. (iii) There exist systematic differences in these lead-lag relations across countries and over time suggesting that the effectiveness of regulation is shaped by fundamental country characteristics like market development and legal tradition.

Suggested Citation

  • Luzi Hail & Ahmed Tahoun & Clare Wang, 2017. "Corporate Scandals and Regulation," Working Papers Series 71, Institute for New Economic Thinking.
  • Handle: RePEc:thk:wpaper:71
    DOI: 10.2139/ssrn.3228697
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    More about this item

    Keywords

    Accounting fraud; Corporate scandals; Capital market regulation; Economics of regulation; Law and finance; International accounting;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G18 - Financial Economics - - General Financial Markets - - - 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
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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