On the Nature of the Reputational Penalty for Corporate Crime: Evidence

Cindy R Alexander

Journal of Law and Economics, 1999, vol. 42, issue 1, 489-526

Abstract: Recent literature on optimal sanctions for corporations has focused on coordination and refinement of criminal, civil, and market-based sanctions. This paper contributes to emerging evidence on the reputational penalties that public corporations pay for federal crimes. First, it is shown that offenses harming only private parties and not government tend to be addressed through civil or market-based and not criminal sanctions. Second, when criminal allegations do arise, they are often surrounded by reports of terminated or suspended customer relationships and of management or employee turnover. These reports are more frequent if damaged parties are customers, as in fraud, than if they are third parties, as in environmental crime, and if stock prices decline significantly at the first news of crime. All of these features are consistent with characterizations of reputational penalties found in the literature. Findings on the nonatomistic nature of damaged parties suggest directions for future research. Copyright 1999 by the University of Chicago.

Date: 1999
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