Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-22T22:22:07.990Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  01 February 2009

Deborah L. Murphy ,
Ronald E. Shrieves  and
Samuel L. Tibbs
Deborah L. Murphy
Affiliation:
University of Tennessee, College of Business Administration, Stokely Management Center, Knoxville, TN 37996. [email protected]
Ronald E. Shrieves
Affiliation:
University of Tennessee, College of Business Administration, Stokely Management Center, Knoxville, TN 37996. [email protected]
Samuel L. Tibbs
Affiliation:
East Carolina University, College of Business, 3113 Bate Building, Greenville, NC 27858. [email protected]
Get access Rights & Permissions [Opens in a new window]

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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 55 - 83
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alexander, C. “On the Nature of the Reputational Penalty for Corporate Crime: Evidence.” Journal of Law and Economics, 42 (1999), 489–526.CrossRefGoogle Scholar
Anderson, E. W.; Ghysels, E.; and Juergens, J. L.. “Do Heterogeneous Beliefs Matter for Asset Pricing? ” The Review of Financial Studies 18 (2005), 875–915.CrossRefGoogle Scholar
Barber, B. M., and Lyon, J. D.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of the Test Statistics.” Journal of Financial Economics, 41 (1996), 359–399.CrossRefGoogle Scholar
Barry, C. B., and Brown, S. J.. “Differential Information and Security Market Equilibrium.” The Journal of Financial and Quantitative Analysis, 20 (1985), 407–422.CrossRefGoogle Scholar
Brown, S. J., and Warner, J. B.. “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (1985), 3–31.CrossRefGoogle Scholar
Denis, D. J., and Denis, D. K.. “Performance Changes Following Top Management Dismissals.” Journal of Finance, 50 (1995), 1029–1057.CrossRefGoogle Scholar
Detemple, J., and Murthy, S.. “Intertemporal Asset Pricing with Heterogeneous Beliefs.” Journal of Economic Theory, 62 (1994), 294–320.CrossRefGoogle Scholar
Easley, D., and O’Hara, M.. “Information and the Cost of Capital.” Journal of Finance, 59 (2004), 1553–1583.CrossRefGoogle Scholar
Huson, M. R.; Malatesta, P. H.; and Parrino, R.. “Managerial Succession and Firm Performance.” Journal of Financial Economics, 74 (2004), 237–275.CrossRefGoogle Scholar
Jarrell, G., and Peltzman, S.. “The Impact of Product Recalls on the Wealth of Sellers.” The Journal of Political Economy, 3 (1985), 512–536.CrossRefGoogle Scholar
Karpoff, J., and Lott, J. R. Jr. “The Reputational Penalty Firms Bear from Committing Criminal Fraud.” Journal of Law and Economics, 36 (1993), 757–802.CrossRefGoogle Scholar
Karpoff, J. M.; Lee, D. S.; and Martin, G. S.. “The Cost to Firms of Cooking the Books.” Journal of Financial and Quantitative Analysis, 43 (2008), 581–612.CrossRefGoogle Scholar
Karpoff, J.; Lee, D. S.; and Vendrzyk, V. P.. “Defense Procurement Fraud, Penalties, and Contractor Influence.” Journal of Political Economy, 107 (1999), 809–842.CrossRefGoogle Scholar
Karpoff, J.; Lott, J. R. Jr.; and Wehrly, E. W.. “The Reputational Penalties for Environmental Violations: Empirical Evidence.” Journal of Law and Economics, 48 (2005), 653–675.CrossRefGoogle Scholar
Klein, B., and Leffler, K. B.. “The Role of Market Forces in Assuring Contractual Performance.” Journal of Political Economy, 89 (1981), 615–641.CrossRefGoogle Scholar
Merton, R. C. “A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (1987), 483–510.CrossRefGoogle Scholar
O’Hara, M. “Liquidity and Price Discovery.” Journal of Finance, 58 (2003), 1335–1354.CrossRefGoogle Scholar
Qu, S.; Starks, L.; and Yan, H.. “Risk, Dispersion of Analyst Forecasts and Stock Returns.” Working Paper, University of Texas at Austin (2003).Google Scholar
Uzun, H.; Szewczyk, S. H.; and Varma, R.. “Board Composition and Corporate Fraud.” Financial Analysts Journal, 60 (2004), 33–43.CrossRefGoogle Scholar