When LIBOR becomes LIEBOR: Reputational Penalties and Bank Contagion
45 Pages Posted: 23 May 2018 Last revised: 23 Dec 2019
Date Written: August 28, 2015
We study whether commonality of incentives and opportunity to commit fraud triggers reputational contagion from culpable firms to non-culpable firms. Relying on a sample of thirty banks involved in fixing the LIBOR and a control sample of thirty banks, we find that banks' reputations suffered substantial damage upon the announcement of their involvement in the scandal. We also document reputational contagion spread from banks that manipulated LIBOR to banks that shared the same incentives and opportunity to commit the fraud. Additional analyses show that the reputational contagion is more pronounced for large derivatives dealers, who have had the strongest incentive to commit the fraud.
Keywords: Reputational Penalties, Bank Contagion, Fraud Triangle
JEL Classification: G14, M41
Suggested Citation: Suggested Citation