Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk
Posted: 12 Jul 2007 Last revised: 27 Aug 2014
Date Written: February 2009
We examine the relationship between allegations of corporate misconduct and changes in profitability and risk of the alleged offender. Profitability is measured as reported earnings and analysts' earnings forecasts. Risk is measured as stock return volatility and concordance among analysts' forecasts. Decreases in earnings and increases in risk are found to accompany allegations of misconduct, and although the results are somewhat sensitive to the earnings and risk metrics used, the changes are found to be consistently greater for related-party offenses. The importance of reputational penalties is underscored by analysis of the association between allegation-related changes in firm value and changes in earnings and risk.
Keywords: crime, corporate misconduct, fraud, reputational penalties
JEL Classification: K42, M14
Suggested Citation: Suggested Citation