Hostname: page-component-7c8c6479df-ws8qp Total loading time: 0 Render date: 2024-03-26T14:42:32.764Z Has data issue: false hasContentIssue false

Regulatory Sanctions and Reputational Damage in Financial Markets

Published online by Cambridge University Press:  03 July 2017

Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We study the impact of the enforcement of financial regulation by the United Kingdom’s regulatory authorities on the market price of penalized firms. Existing studies rely on analyses of multiple events that may distort the measurement of reputational losses. In the United Kingdom, the entire enforcement process involves only one public announcement and is accompanied by complete information on legal penalties. We find that reputational losses are nearly nine times the size of fines and are associated with misconduct harming customers or investors but not third parties.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

We are grateful to an anonymous referee and Jarrad Harford (the editor) for helpful comments on a previous version of this article. We gratefully acknowledge financial support from the Oxford University Centre for Corporate Reputation. We thank Cindy Alexander, Jennifer Arlen, Sara George, Ed Glaeser, Jeff Gordon, Jonathan Karpoff, Michael Knight, Meziane Lasfer, Jose Martinez, Alan Morrison, Richard Zeckhauser, and seminar and conference participants at the 2012 Annual Meeting of the American Finance Association in Chicago, the Bank for International Settlements, Bucerius Law School, the Financial Services Authority (in London and Wilton Park), Harvard University, Hebrew University of Jerusalem, Lancaster University, Oxford University, and Yale University.

References

Alexander, C. R.On the Nature of the Reputational Penalty for Corporate Crime: Evidence.” Journal of Law and Economics, 42 (1999), 489526.CrossRefGoogle Scholar
Armour, J.; Black, B. S.; Cheffins, B. R.; and Nolan, R.. “Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States.” Journal of Empirical Legal Studies, 6 (2009), 701745.CrossRefGoogle Scholar
Bhagat, S., and Romano, R.. “Event Studies and the Law Part I: Technique and Corporate Litigation.” American Law and Economics Review, 4 (2002), 141168.CrossRefGoogle Scholar
Blair, M.; Walker, G.; and Purves, R.. Financial Services Law, 2nd ed. Oxford, UK: Oxford University Press (2009).Google Scholar
Davies, P. Davies Review of Issuer Liability: Final Report. London, UK: HM Treasury (2007).Google Scholar
Fama, E. F.; Fisher, L.; Jensen, M. C.; and Roll, R.. “The Adjustment of Stock Prices to New Information.” International Economic Review, 10 (1969), 121.CrossRefGoogle Scholar
Financial Services Authority. Decision Procedures and Penalties Manual (DEPP). London, UK: FSA (2010).Google Scholar
Haslem, B.; Hutton, I.; and Smith, A.. “How Much Do Corporate Defendants Really Lose? A New Verdict on the Reputation Loss Induced by Corporate Litigation.” Financial Management, 46 (2017), 323358.CrossRefGoogle Scholar
Jarrell, G., and Peltzman, S.. “The Impact of Product Recalls on the Wealth of Sellers.” Journal of Political Economy, 93 (1985), 512536.CrossRefGoogle Scholar
Karpoff, J. M.Does Reputation Work to Discipline Corporate Misconduct?” In Oxford Handbook of Corporate Reputation, Barnett, M. and Pollack, T. G., eds. Oxford, UK: Oxford University Press (2012).Google Scholar
Karpoff, J. M.; Koester, A.; Lee, D. S.; and Martin, G. S.. “Database Challenges in Financial Misconduct Research.” Working Paper, Georgetown University (2014).Google Scholar
Karpoff, J. M.; Lee, D. S.; and Martin, G. S.. “The Cost to Firms of Cooking the Books.” Journal of Financial and Quantitative Analysis, 43 (2008), 581611.CrossRefGoogle Scholar
Karpoff, J. M., and Lott, J. R. Jr. “The Reputational Penalty Firms Bear from Committing Criminal Fraud.” Journal of Law and Economics, 36 (1993), 757802.CrossRefGoogle Scholar
Karpoff, J. M., and Lott, J. R. Jr. “On the Determinants and Importance of Punitive Damage Awards.” Journal of Law and Economics, 42 (1999), 527573.CrossRefGoogle Scholar
Karpoff, J. M.; Lott, J. R. Jr.; and Wehrly, E. W.. “The Reputational Penalties for Environmental Violations: Empirical Evidence.” Journal of Law and Economics, 48 (2005), 653675.CrossRefGoogle Scholar
Klein, B., and Laffler, K. B.. “The Role of Market Forces in Assuring Contractual Performance.” Journal of Political Economy, 89 (1981), 615641.CrossRefGoogle Scholar
Kothari, S. P., and Warner, J. B.. “Econometrics of Event Studies.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 1, Eckbo, B. E., ed. Amsterdam, Netherlands: Elsevier (2007).Google Scholar
London Stock Exchange. Inside AIM. London, UK: LSE (2009).Google Scholar
London Stock Exchange. AIM Rules for Companies—February 2010. London, UK: LSE (2010).Google Scholar
Mitchell, M. L., and Maloney, M. T.. “Crisis in the Cockpit? The Role of Market Forces in Promoting Air Travel Safety.” Journal of Law and Economics, 32 (1989), 329355.CrossRefGoogle Scholar
Murphy, D. L.; Shrieves, R. E.; and Tibbs, S. L.. “Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk.” Journal of Financial and Quantitative Analysis, 44 (2009), 5583.CrossRefGoogle Scholar
Shapiro, C.Premiums for High-Quality Products as Returns to Reputations.” Quarterly Journal of Economics, 98 (1983), 659680.CrossRefGoogle Scholar