The Impact of SEC Litigation on Firm Value
33 Pages Posted: 19 Feb 2008
This paper examines the effect of the announcement of the Securities and Exchange Commission's (SEC) legal enforcement actions. The results indicate that SEC lawsuits have a negative effect on share price. This is no surprise, but the real interest lies in understanding what characteristics of the legal enforcement process have greatest effects on firm value. Findings indicate that firms which communicate with the market regarding their enforcement cases receive more favorable treatment than those that do not. The results also show that the markets are able to differentiate between minor and major violations, with fraud and insider trading cases returning greater negative results than procedural violations and improper accounting. Case outcomes also elicit differential reactions; pending and partially settled cases have larger short-term negative returns than cases with known outcomes of similar nature, perhaps due to high levels of uncertainty. The focus is on recent history in an attempt to reflect accurately the current market climate.
JEL Classification: G14, G18, G28
Suggested Citation: Suggested Citation