do financial markets discipline corporate maleficence by driving down stock prices ? tackling money...
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Do Financial Markets Discipline Corporate Maleficence by
Driving Down Stock Prices ?
Tackling Money Laundering Conference
Utrecht, 2-3 November 2007
Peter-Jan EngelenUtrecht University, the Netherlands
Slide nr.2
Background of the project
Relationship between discovery of illegal corporate behaviour and stock prices
Do shareholders punish companies by driving down stock prices?
Is there any price for corporate maleficence?
Disciplinary roleMagnitude of penalty
Slide nr.3
Background of the project – cont’d Event study methodology
Campbell, Lo and MacKinlay (1997), Chap.4
MacKinlay (JEL, 1997)McWilliams and Siegel (AMJ, 1997)Armitage (JES, 1995)
Two exploratory studiesLow countriesSample of 5 European countries
Slide nr.4
Methodology Event study
AARE aggregate of individual abnormal stock returns aligned in event time
Calculating individual ARs:
0:
0:
1
0
E
E
AARH
AARH
N
iEiE AR
NAAR
1,
1
tititi RERAR ,,,
Slide nr.5
Benchmark expected return models Market-adjusted model
Market model
Dimson model for thin trading correction
tmtiti RRAR ,,,
tmiititi RbaRAR ,,,ˆˆ
tmDi
Dititi RRAR ,,,
ˆˆ
iiiiiDi bbbbb ,2,1,0,1,2
ˆˆˆˆˆˆ
23
138,
23
138, 116
1ˆ116
1ˆ
t
ttm
Di
t
tti
Di RR
Slide nr.6
Test statistics
Traditional t-test of Brown and Warner (1985)
1~1,
Nt
N
SAR
testt
N
iEi
i
EiEi s
ARSARwith
ˆ,
,
Slide nr.7
Test statistics – cont’d
Potential problemsEvent-induced variance
• Variance during event window exceeds variance over estimation period
Thin trading• Non-normal return distribution
Traditional test statistics might be misspecified
Non-parametric tests do not depend on assumptions about probability distribution of returns
Exploratory study 1
Slide nr.9
Sample description
Preliminary study
The Low Countries (B, NL)
Listed on Euronext Brussels or Amsterdam
1994-2003
Public announcement of 57 cases of corporate malconduct
Leading financial newspapers (FD, FET)
Slide nr.10
Scopei. Impact of different types of illegal
behaviour Insider trading, corruption, tax fraud,
accounting fraud, miscellaneous
ii. Impact of company versus individual level
iii. Impact of phase Rumour Formal investigation (police, judicial)
iv. Impact of direct versus indirect effect Bottom line (direct) Reputation (indirect)
Slide nr.11
Hypotheses Hyp.1 – Stock prices of listed firm show a
negative abnormal return upon the announcement of the corporate malconduct
Hyp.2 – A value-impact corporate malconduct exhibits a larger negative abnormal return of stock returns than a maleficence with only an impact on the trust of shareholders
Hyp.3 – Corporate malconduct at the firm level has a larger negative abnormal return than at the individual level
Hyp.4 – The further corporate maleficence is along the formal investigation procedure, the larger the abnormal negative return
Slide nr.12
Empirical results – Total sample (Madj)
Day N AAR t-value-2 57 -0.73% -1.96-1 57 -0.41% -1.110 57 -0.94% -2.54*
+1 57 -1.03% -2.78**
+2 57 -0.13% -0.35+3 57 -0.09% -0.24+5 57 0.91% 2.45
Slide nr.13
Empirical results – subsamples Corruption
Only day 0 sign. at 5% level using MM (-1.77%) Other days no significant ARs
Tax fraud Sign. at 5% level at day 0 (-0.99%) Sign. at 1% level at day [+1] (-3.55%) (-
4.54%)
Insider trading Not sign. at day 0 (-0.66%) Sign. at 1% level at day [-1] (-2.13%)
Slide nr.14
Empirical results – subsamples
Accounting fraudSign. AR at day [-2] at 1% level (-10.40%)
Miscellaneous Sign. AR at day 0 at 1% level (-1.20%)
Slide nr.15
Empirical results – subsamples
StadiumNo price reaction for rumoursSign. neg. AR for court phase
Firm vs. individual levelNo difference
Bottom-line vs. trustHigher impact for bottom-line events
Exploratory study 2
Slide nr.17
Sample description Public announcement of 239 cases of
corporate malconduct Leading financial newspapers 1995-2005 Five countries
Belgium, France, Germany, the Netherlands, UK
Five types of corporate malconductInsider trading, tax and accounting fraud,
bribery, price fixing and market power abuse, miscellaneous
Slide nr.18
Sample description – cont’dCountryFrance 51Belgium 18UK 63The Netherlands 43Germany 64TypeInsider trading 62Fraud 51Bribery 23Price fixing 93
Slide nr.19
Empirical results (Madj)all
(239)
fraud
(51)
bribery
(23)
price
(93)
insider
(62)
-2 -0.09%
+0.17%
+0.01%
-0.20%
-0.28%
-1 -1.04%
+1.13%
-0.25%
-0.96%
-2.45%
0 -0.08%
-1.98%
+0.20%
+0.29%
-1.97%
+1 +0.06%
-0.06%
+0.15%
-0.13%
+0.60%
+2 -0.18%
-0.11%
-0.28%
-0.12%
-0.89%
[-5,+5]
-2.07%
-1.20%
-1.15%
-0.64%
-5.36%
Slide nr.20
Empirical results (Madj) – cont’d
All
(239)
France
(51)
Germ.
(64)
UK
(63)
Nether.
(43)
Belg.
(18)
-2 -0.09%
-0.23%
-1.14%
+0.23%
+0.57%
+1.67%
-1 -1.04%
-0.40%
-1.17%
-0.98%
-2.08%
-0.38%
0 -0.08%
+0.06%
-1.85%
-0.56%
-0.40%
-1.21%
+1 +0.06%
-0.19%
+0.82%
+0.09%
-0.43%
-0.89%
+2 -0.18%
-0.37%
-1.28%
+0.59%
+0.45%
+0.27%
[-5,+5]
-2.07%
-1.63%
-5.51%
+0.18%
-2.23%
+1.53%
Slide nr.21
Further research Larger sample with richer taxonomy of
corporate malconduct
Cross-country (five countries) – cultural differences
Differences in types across countries
Differences pre and post Enron (mental framing) or other time-effects
Interpretation and consequences of the results for business ethics