Enforcement Waves and Spillovers

43 Pages Posted: 24 Feb 2020

See all articles by Hae Mi Choi

Hae Mi Choi

Loyola University Chicago

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics

Gerald S. Martin

American University - Kogod School of Business

Date Written: September 12, 2019

Abstract

We document that regulatory enforcement actions for financial misrepresentation cluster in industry-specific waves and that wave-related enforcement has information spillovers on industry peer firms. Waves and spillovers have significant effects on share prices. Early-wave target firms have the largest short-run losses in share values and the largest information spillovers on industry peer firms. Late-wave targets’ short-run losses are smaller, but not because they involve less costly instances of misconduct. Rather, late-wave targets are subject to more information spillovers from earlier in the wave. These results indicate that prices efficiently incorporate changes in the likelihood a firm will face enforcement action for financial misconduct. As a result, short-window losses are biased measures of the total share price impact, particularly for firms whose financial misrepresentation is revealed late in an enforcement wave.

Keywords: SEC, misrepresentation, fraud, enforcement, market efficiency

JEL Classification: G38, K22, L51, M48

Suggested Citation

Choi, Hae Mi and Karpoff, Jonathan M. and Lou, Xiaoxia and Martin, Gerald S., Enforcement Waves and Spillovers (September 12, 2019). Available at SSRN: https://ssrn.com/abstract=3526555 or http://dx.doi.org/10.2139/ssrn.3526555

Hae Mi Choi

Loyola University Chicago ( email )

25 East Pearson Street
Chicago, IL 60611
United States

Jonathan M. Karpoff (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3200
United States
206-685-4954 (Phone)
206-221-6856 (Fax)

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

Gerald S. Martin

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)

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