The Monetary Benefit of Cooperation in Regulatory Enforcement Actions for Financial Misrepresentation
University of Texas at Dallas
Gerald S. Martin
American University - Kogod School of Business
Stephanie J. Rasmussen
University of Texas at Arlington
March 19, 2012
We examine the monetary benefits of cooperation for 1,059 enforcement actions initiated by the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) for financial misrepresentation from 1978-2011. We estimate that firm cooperation results in a 12% increase in the probability of regulators bringing charges against firms. However, using a Heckman full maximum likelihood estimator, we find that being credited for cooperation by regulators reduces the monetary penalties firms pay by 35% (conversely, non-cooperation increases monetary penalties by 53%). Assuming an average penalty, this translates to a $6 million benefit from cooperation. When cooperation credit is coupled with conducting an independent investigation and making the results available to regulators, monetary penalties are reduced by 47%, or $8.2 million on average. These estimates are robust to controlling for factors considered by the SEC and DOJ when determining whether or not to bring charges and determining penalties. Alternative estimators provide similar estimates of the monetary benefits of cooperation.
Number of Pages in PDF File: 53
Keywords: Fraud, Penalties, Financial reporting, Litigation, Securities and Exchange Commission
JEL Classification: G38, K22, K42, M41, M48working papers series
Date posted: March 22, 2012
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