Stock market reactions to corporate misconduct: The moderating role of legal origin

Elias Erragragui, Jonathan Peillex, Mohammed Benlemlih and Mohammad Bitar

Economic Modelling, 2023, vol. 121, issue C

Abstract: Does a country's legal regime shape stock market reactions to corporate misconduct? In the presence of conflicting legal views, efficient regulation through sanctions and deterrence is difficult to establish. Using data from 2164 environmental, social, and governance controversies over the 2010–2015 period, we examine whether the legal regime in which firms operate shapes stock markets reactions to announcement of corporate controversies. We find a larger and consistent stock market correction following corporate misconduct announcements among firms headquartered in civil law countries. As such, we report a greater correction under Scandinavian legal regime that is robust when controlling for endogeneity, self-selection, and country- and firm-level controls. Presence of litigation eliminates the incremental penalty of the civil law while higher internal and external monitoring exacerbates it. Our findings support the optimal penalty theory, in which stock market sanctions are viewed as complementary reputational penalties that balance the limits of legal enforcement mechanisms.

Keywords: Event study, environmental, social, and governance controversies; Stock prices; Legal origin; Reputational penalty (search for similar items in EconPapers)
JEL-codes: G14 K22 L51 M14 O12 O57 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:121:y:2023:i:c:s0264999323000093

DOI: 10.1016/j.econmod.2023.106197

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