Enforcement Waves and Spillovers

Hae Mi Choi (), Jonathan M. Karpoff (), Xiaoxia Lou () and Gerald S. Martin ()
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Hae Mi Choi: Loyola University of Chicago, Chicago, Illinois 60611
Jonathan M. Karpoff: University of Washington, Seattle, Washington 98195
Xiaoxia Lou: University of Delaware, Newark, Delaware 19716
Gerald S. Martin: American University, Washington, District of Columbia 20016

Management Science, 2024, vol. 70, issue 2, 834-859

Abstract: We document that regulatory enforcement actions for financial misrepresentation cluster in industry-specific waves and that wave-related enforcement has information spillovers on industry peer firms. Waves and spillovers have significant effects on share prices. Early-wave target firms have the largest short-run losses in share values and the largest information spillovers on industry peer firms. Late-wave targets’ short-run losses are smaller, but not because they involve less costly instances of misconduct. Rather, late-wave targets are subject to more information spillovers from earlier in the wave. These results indicate that prices incorporate changes in the likelihood that a firm will face wave-related enforcement action for financial misconduct. Short-window share-price losses understate the total share-price impact, particularly for firms whose financial misrepresentation is revealed late in an enforcement wave.

Keywords: SEC; misrepresentation; fraud; enforcement; market efficiency (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:2:p:834-859

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