Transcript How do companies communicate with financial markets?
Do Financial Markets Discipline Corporate Maleficence by Driving Down Stock Prices ?
Peter-Jan Engelen
Utrecht University, the Netherlands
Tackling Money Laundering Conference Utrecht, 2-3 November 2007
Background of the project
Relationship between discovery of illegal corporate behaviour and stock prices Do shareholders punish driving down stock prices?
companies by Is there any price for corporate maleficence ?
Disciplinary role Magnitude of penalty
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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
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Methodology
Event study
H H
1 0 : :
AAR E AAR E
0 0 AAR E aggregate of individual abnormal stock returns aligned in event time
AAR E
1
N i N
1
AR i
,
E
Calculating individual ARs :
AR i
,
t
,
t
E
i
,
t Slide nr.4
Benchmark expected return models
Market-adjusted model
AR i
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t
R i
,
t
R m
,
t
Market model
AR i
,
t
R i
,
t
a
ˆ
i
b
ˆ
i
R m
,
t
Dimson model for thin trading correction
AR i
,
t
R i
,
t
ˆ
i D
ˆ
i D
ˆ
i D
R m
,
t
b
ˆ 2 ,
i
b
ˆ 1 ,
i
b
ˆ 0 ,
i
b
ˆ 1 ,
i
b
ˆ 2 ,
i
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i D
1 116
t t
23 138
R i
,
t
ˆ
i D
1 116
t t
23 138
R m
,
t Slide nr.5
Test statistics
Traditional t-test of Brown and Warner (1985)
t
test
i N
1
SAR i
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E N
~
t
N
1
with SAR i
,
E
AR i
,
E s
ˆ
i Slide nr.6
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
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Exploratory study 1
Sample description
Preliminary study The Low Countries (B, NL) Listed on Euronext Brussels or Amsterdam 1994-2003 Public announcement corporate malconduct of 57 cases Leading financial newspapers (FD, FET) of
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i.
Scope
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)
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Hypotheses
Hyp.1
– Stock prices of listed firm show a abnormal return negative 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
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Empirical results – Total sample (Madj)
Day -2 -1
0 +1
+2 +3 +5 N 57 57 57 57 57 57 57 AAR -0.73% -0.41%
-0.94% -1.03%
-0.13% -0.09% 0.91% t-value -1.96
-1.11
-2.54
* -2.78
** -0.35
-0.24
2.45
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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%)
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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% )
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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
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Exploratory study 2
Public announcement corporate malconduct
Sample description
of 239 cases of 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
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Sample description – cont’d
Country France Belgium UK The Netherlands Germany Type Insider trading Fraud Bribery Price fixing 51 18 63 43 64 62 51 23 93
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-2 -1 all (239) -0.09% -1.04%
Empirical results (Madj)
fraud (51) +0.17% bribery (23) +0.01% +1.13% -0.25% 0 +1 +2 [-5,+5] -0.08% -0.18% -2.07% -1.98% +0.06% -0.06% -0.11% -1.20% price (93) -0.20% -0.96% insider (62) -0.28% -2.45% +0.20% +0.29% -1.97% +0.15% -0.13% +0.60% -0.28% -1.15% -0.12% -0.64% -0.89% -5.36%
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Empirical results (Madj) – cont’d
-2 -1 0 +1 All (239) -0.09% -1.04% -0.40% -0.08% France (51) -0.23% Germ.
(64) -1.14% -1.17% -0.98% +0.06% -1.85% +0.06% -0.19% UK (63) +0.23% +0.57% +1.67% -0.56% Nether.
(43) -2.08% -0.40% +0.82% +0.09% -0.43% Belg.
(18) -0.38% -1.21% -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%
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+1.53%
Larger sample with corporate malconduct Cross-country differences (five
Further research
richer countries) taxonomy Differences in types across countries of – cultural Differences pre and post Enron framing) or other time-effects Interpretation and consequences results for business ethics (mental of the
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