Forgive Me All My Sins: How Penalties Imposed on Banks Travel Through Markets

48 Pages Posted: 25 May 2018

See all articles by Christian Flore

Christian Flore

Darmstadt University of Technology - Chair for Corporte Finance

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Sascha Kolaric

Technische Universität Darmstadt

Dirk Schiereck

Darmstadt University of Technology

Date Written: April 17, 2018

Abstract

From 2005 to 2015, the 25 largest global financial institutions paid more than 285 billion US dollars in legal penalties, corresponding to approximately 20% of their market value. We examine the stock, bond, and CDS market reaction to the announcements of fines and settlements for banks. We document positive stockholder and bondholder valuation effects as well as a tightening of CDS spreads for banks to these resolution announcements. These reactions can be attributed to the resolution of uncertainty surrounding legal proceedings. Moreover, even though monetary penalties are cash-flow-effective, they are not income-effective in the year they are announced, suggesting that banks make adequate provisions for these penalties. In addition, we observe positive spillover effects to other banks facing pending lawsuits with the same plaintiff.

Keywords: banks, lawsuits, settlements, legal fines, investors, capital markets

JEL Classification: G14, G21, K10, K41, K42

Suggested Citation

Flore, Christian and Degryse, Hans and Kolaric, Sascha and Schiereck, Dirk, Forgive Me All My Sins: How Penalties Imposed on Banks Travel Through Markets (April 17, 2018). Available at SSRN: https://ssrn.com/abstract=3178589 or http://dx.doi.org/10.2139/ssrn.3178589

Christian Flore (Contact Author)

Darmstadt University of Technology - Chair for Corporte Finance ( email )

Hochschulstrasse 1
Darmstadt, 64289
Germany

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sascha Kolaric

Technische Universität Darmstadt ( email )

Hochschulstrasse 1
Darmstadt, 64289
Germany

HOME PAGE: http://www.cofi.wi.tu-darmstadt.de/team_cofi/wimi_cofi/kolaric_cofi/index.en.jsp

Dirk Schiereck

Darmstadt University of Technology ( email )

Universitaets- und Landesbibliothek Darmstadt
Magdalenenstrasse 8
Darmstadt, Hesse D-64289
Germany

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