The Reputational Penalty Firms Bear from Committing Criminal Fraud

Karpoff, Jonathan M.; Lott, John R.

doi:10.1086/467297

Cited by 495 publications

(274 citation statements)

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“…Our results indicate that the market reacts negatively to such violations, and that when these violations are announced, shareholders experience a statistically significant loss in market value. Our results are consistent with the findings of Davidson and Worrell (1988), Karpoff and Lott (1993), Davidson, Worrell and Lee (1994), Frooman (1997), and Karpoff et al (2011) in that the market acknowledges value loss from the release of news of firm illegality. Our results are also consistent with the conjecture that attempting to "win by cheating" yields negative results for shareholders, and that a penalty will be imposed.…”

Section: Discussionsupporting

confidence: 92%

“…They find a negative market reaction to corporate illegalities, particularly to repeat offenders. Karpoff and Lott (1993) examine instances of corporate fraud and find a negative stock price reaction, which is particularly pronounced when the fraud is committed against government agencies, and Karpoff, Lee, and Martin (2011) find large, significant negative abnormal returns to firms prosecuted for foreign bribery. Expanding their study to include data from 1978-2013, they find that over 20% of firms with foreign sales have violated the FCPA for bribery at least once .…”

Section: Corporate Social Responsibility and Corporate Illegalitiesmentioning

confidence: 99%

“…Given that most studies (Davidson & Worrell, 1988;Karpoff & Lott, 1993;Davidson,Worrell, & Lee, 1994) find a negative stock price reaction to announcements of corporate illegality, we expect:…”

Section: Hypothesesmentioning

confidence: 99%

“…Karpoff and Lott (1993) argue that the "reputational cost of corporate fraud is large and constitutes most of the cost incurred by firms accused or convicted of fraud" (p. 758). These reputational effects may be long-lasting.…”

Section: Hypothesesmentioning

confidence: 99%

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An Exploratory Examination of Export Control Act Violations

Wiggenhorn¹,

Gleason²,

Sukhwani³

2014

IBR

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This paper examines the impact of violations of export control policy from a multinational enterprise's perspective. We describe the kinds of regulation in place in the U.S. over the past decade, and identify the characteristics of firms who have been caught and fined for violations of export restrictions. Furthermore, we investigate the response of shareholders to news regarding trade violations and find that they suffer a statistically significant -1.15% abnormal returns over the three day announcement window. Not surprisingly, we find that the reaction post 9-11 is worse as is the reaction when the export violations occur with countries perceived to be corrupt. We also find that systematic risk and total risk increase for violators following their investigations. Further, any penalty in terms of long run performance for ECA violations is limited to those violations with the "corrupt" countries.

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Section: Discussionsupporting

confidence: 92%

Section: Corporate Social Responsibility and Corporate Illegalitiesmentioning

confidence: 99%

Section: Hypothesesmentioning

confidence: 99%

Section: Hypothesesmentioning

confidence: 99%

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An Exploratory Examination of Export Control Act Violations

Wiggenhorn¹,

Gleason²,

Sukhwani³

2014

IBR

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“…Fraud and lawsuits decrease firm value Karpoff and Lott (1993) report that frauds are associated with decreases in firm value and earnings. Bhagat et al (1998) find that no matter who brought a lawsuit against a firm, the defending firm experienced statistically significant losses in firm value upon the lawsuit filing.…”

Section: Theoretical Developmentmentioning

confidence: 99%

The Effects of Fraud and Lawsuit Revelation on U.S. Executive Turnover and Compensation

Persons

2006

J Bus Ethics

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This study investigates the impact of fraud/lawsuit revelation on U.S. top executive turnover and compensation. It also examines potential explanatory variables affecting the executive turnover and compensation among U.S. fraud/lawsuit firms. Four important findings are documented. First, there was significantly higher executive turnover among U.S. firms with fraud/ lawsuit revelation in the Wall Street Journal than matched firms without such revelation. Second, although on average, U.S. top executives received an increase in cash compensation after fraud/lawsuit revelation, this increase is smaller than that of matched non-fraud/lawsuit firms. Third, fraud/lawsuit firms were more likely to change top executive when chief executive officer (CEO) was not the board chairman and CEO had been on the board for a short time. Fourth, fraud/lawsuit firms were more likely to reduce their executive cash compensation when profitability was low, firms were involved in fraud, the compensation committee size was small, and the board met more often. These findings indicate that although, in general, U.S. fraud/lawsuits firms did not reduce their executive cash compensation, those involved in fraud were more likely to reduce their executive cash compensation than to change their top executives. The finding, that ethical standards is not a significant factor for U.S. executive turnover nor compensation reduction,suggests that ethics appears to play no part in the board's decisions, and that U.S. firms may have ethical standards in writing but they do not implement nor enforce the standards.

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Operational Risk: Definition, Classification, and its Place among Other Risks

2012

Operational Risk

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The Reputational Penalty Firms Bear from Committing Criminal Fraud

Cited by 495 publications

References 0 publications

An Exploratory Examination of Export Control Act Violations

An Exploratory Examination of Export Control Act Violations

The Effects of Fraud and Lawsuit Revelation on U.S. Executive Turnover and Compensation

Operational Risk: Definition, Classification, and its Place among Other Risks

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