Enforcement Waves and Spillovers

59 Pages Posted: 24 Feb 2020 Last revised: 17 Mar 2023

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; European Corporate Governance Institute (ECGI)

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics

Gerald S. Martin

American University - Kogod School of Business

Date Written: July 15, 2022

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 incorporate changes in the likelihood a firm will face wave-related enforcement action for financial misconduct. Short window share price losses understate 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 (July 15, 2022). Management Science - Forthcoming, European Corporate Governance Institute – Finance Working Paper No. 835/2022, 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)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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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