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Impact of Corporate Maleficence on Stock Prices: Insights from the Utrecht Conference

This project investigates the relationship between corporate maleficence and stock prices by analyzing the impact of various illegal corporate behaviors on shareholder value. Through event study methodologies, we explore how illegal activities, such as insider trading and accounting fraud, influence stock returns upon public announcements. The findings highlight significant negative abnormal returns correlated with different types of maleficence, informing broader implications for corporate governance and market regulation. Further research is proposed to examine cross-country variations and their ethical implications.

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Impact of Corporate Maleficence on Stock Prices: Insights from the Utrecht Conference

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  1. Do Financial Markets Discipline Corporate Maleficence by Driving Down Stock Prices? Tackling Money Laundering Conference Utrecht, 2-3 November 2007 Peter-Jan Engelen Utrecht University, the Netherlands p.engelen@econ.uu.nl

  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 role • Magnitude of penalty

  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 studies • Low countries • Sample of 5 European countries

  4. Methodology • Event study • AAREaggregate of individual abnormal stock returns aligned in event time • Calculating individual ARs:

  5. Benchmark expected return models • Market-adjusted model • Market model • Dimson model for thin trading correction

  6. Test statistics • Traditional t-test of Brown and Warner (1985)

  7. Test statistics – cont’d • Potential problems • Event-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

  8. Exploratory study 1

  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)

  10. Scope • Impact of different types of illegal behaviour • Insider trading, corruption, tax fraud, accounting fraud, miscellaneous • Impact of company versus individual level • Impact of phase • Rumour • Formal investigation (police, judicial) • Impact of direct versus indirect effect • Bottom line (direct) • Reputation (indirect)

  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

  12. Empirical results – Total sample (Madj)

  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%)

  14. Empirical results – subsamples • Accounting fraud • Sign. AR at day [-2] at 1% level (-10.40%) • Miscellaneous • Sign. AR at day 0 at 1% level (-1.20%)

  15. Empirical results – subsamples • Stadium • No price reaction for rumours • Sign. neg. AR for court phase • Firm vs. individual level • No difference • Bottom-line vs. trust • Higher impact for bottom-line events

  16. Exploratory study 2

  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 malconduct • Insider trading, tax and accounting fraud, bribery, price fixing and market power abuse, miscellaneous

  18. Sample description – cont’d

  19. Empirical results (Madj)

  20. Empirical results (Madj) – cont’d

  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

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