Working Paper: CEPR ID: DP8058
Authors: John Armour; Colin Mayer; Andrea Polo
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.
Keywords: Corporate Law; Enforcement; Regulation; Reputation
JEL Codes: G28; G38; K22; K42; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Announcement of enforcement actions by the FSA and LSE (G18) | Statistically significant negative abnormal returns for firms (G14) |
| Misconduct affecting trading partners (L14) | Larger reputational losses (F65) |
| Misconduct harming third parties (K42) | Weakly positive effect on reputational losses (F69) |
| Reputational losses (G33) | Greater than financial penalties (G32) |
| Size of financial penalty (G18) | No significant correlation with level of reputational loss (G33) |