Corporate Scandals and Capital Structure

58 Pages Posted: 18 Sep 2009 Last revised: 29 Sep 2015

See all articles by Stefano Bonini

Stefano Bonini

Stevens Institute of Technology - School of Business

Diana Boraschi-Diaz

Bocconi University

Date Written: December 12, 2010


We analyze whether companies involved in a securities class action suit (SCAS) exhibit differential capital structure decisions, and if the information revealed by a corporate scandal affects the security issuances and stock prices of industry peers. Our findings show that before a SCAS is filed, companies involved in a scandal show a greater amount of security offerings and, due to equity mispricing, are more likely to use equity as a financing mechanism. Following the SCAS filing, they exhibit decreasing amount of total external finance raised and lower levels of book and market leverage. Industry peers' issuance patterns exhibit significant contagion, with reduced debt and equity issuance following the SCAS filing. Corporate scandals have also meaningful negative effects on stock prices and bond ratings. Similarly to capital structure, we document contagion at the industry level with peers' share prices yielding negative returns as well.

Keywords: corporate scandals, security offerings, capital structure, contagion effect, market timing

JEL Classification: G32, G33, K41

Suggested Citation

Bonini, Stefano and Boraschi-Diaz, Diana, Corporate Scandals and Capital Structure (December 12, 2010). Journal of Business Ethics, Forthcoming; Paris December 2010 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: or

Stefano Bonini (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Diana Boraschi-Diaz

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136

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