Causal Evidence on the Effects of Enforcement Investigations

48 Pages Posted: 8 Feb 2021

See all articles by Marius Gros

Marius Gros

Niederrhein University of Applied Sciences; Goethe University Frankfurt - Department of Accounting and Auditing

Martin Nienhaus

Goethe University Frankfurt

Christopher Oehler

Goethe University Frankfurt

Date Written: February 1, 2021

Abstract

We examine the costs and benefits of financial reporting enforcement investigations using a proprietary data set on randomly and risk-based selected enforcement investigations of listed German firms from 2005 to 2018. We find that risk-based selected firms show significant abnormal returns of -15.4 percent during investigations, whereas randomly selected firms do not show abnormal changes in firm value. Analyzing the role of selection reveals that the negative abnormal returns for risk-based selected investigations are likely the result of selection, and not caused by investigations themselves. Consistently, we find that risk-based selected firms, but not randomly selected firms, change their financial reporting behavior and transparency during enforcement investigations. Collectively, our study suggests that the negative firm-level outcomes of enforcement investigations as shown by prior research are likely a result of the selection process, and that enforcement investigations per se do not cause significant costs or benefits.

Keywords: costs and benefits of enforcement, financial reporting enforcement, firm-level effects of investigations

JEL Classification: G14, G18, G38, K22, K42, M41

Suggested Citation

Gros, Marius F. and Nienhaus, Martin and Oehler, Christopher, Causal Evidence on the Effects of Enforcement Investigations (February 1, 2021). Available at SSRN: https://ssrn.com/abstract=3777038 or http://dx.doi.org/10.2139/ssrn.3777038

Marius F. Gros

Niederrhein University of Applied Sciences ( email )

Germany

Goethe University Frankfurt - Department of Accounting and Auditing ( email )

Theodor-W.-Adorno-Platz 1
60323 Frankfurt
Germany

Martin Nienhaus (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Christopher Oehler

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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