Causal Evidence on the Effects of Enforcement Investigations
50 Pages Posted: 8 Feb 2021 Last revised: 2 Jul 2021
Date Written: February 1, 2021
We examine the firm-level consequences of financial reporting enforcement investigations using proprietary data on risk-based and randomly selected investigations in Germany. We find that risk-based firms take longer to file financial reports, become opaque, and experience abnormal returns of -15.4 percent when under investigation. In contrast, randomly selected firms do not show any abnormal changes. This result is not due to inherent differences in investigation intensity between risk-based and randomly selected investigations. Instead, the negative consequences of risk-based selected investigations are the result of selection. Collectively, we document that 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: Suggested Citation