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Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk

Published online by Cambridge University Press:  01 February 2009

Deborah L. Murphy ,
Ronald E. Shrieves  and
Samuel L. Tibbs
Deborah L. Murphy
Affiliation:
University of Tennessee, College of Business Administration, Stokely Management Center, Knoxville, TN 37996. dgunthor@utk.edu
Ronald E. Shrieves
Affiliation:
University of Tennessee, College of Business Administration, Stokely Management Center, Knoxville, TN 37996. rshrieve@utk.edu
Samuel L. Tibbs
Affiliation:
East Carolina University, College of Business, 3113 Bate Building, Greenville, NC 27858. tibbss@ecu.edu
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Abstract

We examine the relationship between allegations of corporate misconduct and changes in profitability and risk of the alleged offender. Profitability is measured as reported earnings and analysts’ earnings forecasts. Risk is measured as stock return volatility and concordance among analysts’ forecasts. Decreases in earnings and increases in risk are found to accompany allegations of misconduct, and although the results are somewhat sensitive to the earnings and risk metrics used, the changes are found to be consistently greater for related-party offenses. The importance of reputational penalties is underscored by analysis of the association between allegation-related changes in firm value and changes in earnings and risk.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 55 - 83
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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