Abstract

http://ssrn.com/abstract=1678028
 
 

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Regulatory Sanctions and Reputational Damage in Financial Markets


John Armour


University of Oxford - Faculty of Law; University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Colin Mayer


University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Andrea Polo


Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

September 14, 2012

Oxford Legal Studies Research Paper No. 62/2010
ECGI - Finance Working Paper No. 300/2010

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. Prior literature on reputational penalties has suffered from the existence of a number of confounding factors that render it hard to disentangle reputational from other losses. In the UK, the FSA and LSE only make the investigation (and its result) public if and when the firm is found to have breached the rules and incurs a fine and/or an order to pay compensation. This means that the announcement of a breach is an exceptionally clean signal to the market about the extent to which the firm in question abides by its legal obligations. We find that reputational sanctions are very real: their stock price impact is on average almost 9 times larger than the financial penalties imposed. Furthermore, reputational losses are confined to misconduct that directly affects second 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. We find evidence of an enduring effect on the solvency of unlisted firms subject to second party sanctions. Our results have significant implications for understanding both corporate reputation and regulatory policy.

Number of Pages in PDF File: 49

Keywords: Regulation, Reputation, Enforcement, Corporate Law, Financial Regulation

JEL Classification: G28, G38, K22, K42, L51

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Date posted: September 16, 2010 ; Last revised: September 15, 2012

Suggested Citation

Armour, John and Mayer, Colin and Polo, Andrea, Regulatory Sanctions and Reputational Damage in Financial Markets (September 14, 2012). Oxford Legal Studies Research Paper No. 62/2010; ECGI - Finance Working Paper No. 300/2010. Available at SSRN: http://ssrn.com/abstract=1678028 or http://dx.doi.org/10.2139/ssrn.1678028

Contact Information

John Armour (Contact Author)
University of Oxford - Faculty of Law ( email )
Oriel College
Oxford, OX1 4EW
United Kingdom
+44 1865 286544 (Phone)
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Colin Mayer
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288112 (Phone)
+44 1865 288805 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Andrea Polo
Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )
Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
Barcelona Graduate School of Economics (Barcelona GSE) ( email )
Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain
Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )
Crown Quadrangle 559 Nathan Ab
Stanford, CA 94305-8610
United States
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