Deterrence and the Corporate Death Penalty

40 Pages Posted: 27 Oct 2007 Last revised: 15 Apr 2015

Assaf Hamdani

Hebrew University - Faculty of Law

Alon Klement

Buchman Faculty of Law, Tel Aviv University

Date Written: October 20, 2007

Abstract

Criminal convictions of business entities can trigger their demise, as graphically illustrated by the unraveling of accounting firm Arthur Andersen. The threat of going out of business is commonly perceived as providing firms with powerful - perhaps even excessive - incentives to contain misconduct. This Essay, however, demonstrates that the corporate death penalty may undermine deterrence. Specifically, we show that in many cases harsh corporate penalties may lead to less monitoring for misconduct and undermine compliance incentives within professional firms. We also explore the conditions under which more lenient liability regimes - such as holding firms liable only for sufficiently pervasive misconduct - might enhance deterrence. Our analysis has implications not only for entity criminal liability but also for collective sanctions more generally. For example, the insight that draconian penalties might undermine deterrence in group settings sheds a new light on the wisdom of allowing law and accounting firms to organize as limited-liability entities.

Keywords: Criminal Liability, Corporate Sanction, Marginal Deterrence, Collective Action

Suggested Citation

Hamdani, Assaf and Klement, Alon, Deterrence and the Corporate Death Penalty (October 20, 2007). Available at SSRN: https://ssrn.com/abstract=1024698 or http://dx.doi.org/10.2139/ssrn.1024698

Assaf Hamdani

Hebrew University - Faculty of Law ( email )

Mount Scopus, 91905
Israel

Alon Klement (Contact Author)

Buchman Faculty of Law, Tel Aviv University ( email )

Tel Aviv
Israel

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