Abstract

http://ssrn.com/abstract=1678028
 
 

References (52)



 
 

Citations (4)



 


 



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); University of Oxford - Said Business School

Andrea Polo


Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE)

March 9, 2015

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 UK regulators on the market price of penalized firms. Theory suggests that announcements of misconduct trigger reputational losses, reflecting a decline in wrongdoer firms’ terms of trade. Prior empirical literature, mostly based on US data, suffers from multiple confounding factors making it hard to disentangle reputational from other losses. The UK enforcement process during our period of study involves only a single public announcement per firm, permitting much cleaner identification of reputational losses than the typical sequence of public announcements, stretching over several years, for equivalent enforcement actions in the US. We find reputational losses are very real, averaging nearly nine times the size of financial penalties imposed. Consistently with theory, reputational losses are confined to misconduct harming parties who trade with the firm--for example, mis-selling to customers or misstatements to investors. In contrast, in the case of harms to third parties who do not trade with the firm--for example, failure to implement money laundering checks--the announcement of a fine has no, or even a weakly positive, effect on the stock prices of fined firms. Moreover, even in cases of harms to trading partners, the scale of reputational losses appears unrelated to the magnitude of fines imposed. These results have significant implications for regulatory enforcement and the design of regulation to promote compliance with regulatory rules.

Number of Pages in PDF File: 48

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

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


Open PDF in Browser Download This Paper

Date posted: September 16, 2010 ; Last revised: March 11, 2015

Suggested Citation

Armour, John and Mayer, Colin and Polo, Andrea, Regulatory Sanctions and Reputational Damage in Financial Markets (March 9, 2015). 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 ) ( 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
University of Oxford - Said Business School ( email ) ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288112 (Phone)
+44 1865 288805 (Fax)
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
Feedback to SSRN


Paper statistics
Abstract Views: 5,038
Downloads: 1,327
Download Rank: 7,804
References:  52
Citations:  4

© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.563 seconds