Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk

Posted: 12 Jul 2007 Last revised: 27 Aug 2014

See all articles by Deborah Murphy

Deborah Murphy

University of Tennessee, Knoxville - Department of Finance

Ronald E. Shrieves

University of Tennessee, Knoxville - Department of Finance

Samuel L. Tibbs

American University of Sharjah - School of Business and Management

Date Written: February 2009

Abstract

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

Murphy, Deborah and Shrieves, Ronald E. and Tibbs, Samuel L., Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk (February 2009). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=993479

Deborah Murphy

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

Ronald E. Shrieves

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

Samuel L. Tibbs (Contact Author)

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates
971 06 515 4169 (Phone)

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