Cooperating with Regulators: Meaningful Credit or Sword of Damocles?
University of Texas at Dallas
Gerald S. Martin
American University - Kogod School of Business
Stephanie J. Rasmussen
University of Texas at Arlington
Regulators claim that firm cooperation is rewarded in the enforcement process. Critics contend, however, that firm cooperation leads to “harsh” and “unfair” penalties for cooperating firms. Using 1,162 enforcement actions for financial misrepresentation initiated by the SEC and DOJ, we find that cooperation credit is best explained by remedial actions (e.g., termination of culpable employees) and self-reporting the law violation to regulators. Although we find that cooperation credit increases the likelihood of the firm being charged and penalized, firms receiving cooperation credit realize an average monetary penalty reduction of $25.5 million (46.1 percent). For those firms without cooperation credit, the penalties nearly double. These estimates are robust to controlling for potential selection issues. Our results provide important insights into what constitutes meaningful cooperation with regulators and indicate that there are significant monetary benefits for firms that regulators deem to be cooperative.
Number of Pages in PDF File: 67
Keywords: Fraud, Penalties, Financial reporting, Litigation, Securities and Exchange Commission
JEL Classification: G38, K22, K42, M41
Date posted: March 22, 2012 ; Last revised: September 2, 2015
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