Cooperating with Regulators: Meaningful Credit or Sword of Damocles?

67 Pages Posted: 22 Mar 2012 Last revised: 2 Sep 2015

Rebecca Files

University of Texas at Dallas

Gerald S. Martin

American University - Kogod School of Business

Stephanie J. Rasmussen

University of Texas at Arlington

Date Written: August 2015

Abstract

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.

Keywords: Fraud, Penalties, Financial reporting, Litigation, Securities and Exchange Commission

JEL Classification: G38, K22, K42, M41

Suggested Citation

Files, Rebecca and Martin, Gerald S. and Rasmussen, Stephanie J., Cooperating with Regulators: Meaningful Credit or Sword of Damocles? (August 2015). Available at SSRN: https://ssrn.com/abstract=2026282 or http://dx.doi.org/10.2139/ssrn.2026282

Rebecca Files

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Gerald S. Martin (Contact Author)

American University - Kogod School of Business ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-3914 (Phone)

Stephanie J. Rasmussen

University of Texas at Arlington ( email )

Box 19468
Arlington, TX 76019-0468
United States

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