Does Misconduct Matter?: An Investigation into the Effect of Litigation Announcements on America’s Most Successful Companies

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This study analyses the effect of litigation by the US Security and Exchange Commission on the share price of large public US firms. Event study methodology and regression analysis have been used to examine the impact of SEC litigation announcements filed against Forbes 500 companies during the five year period from 2000 to 2005. Our results confirm our hypothesis, showing statistically significant negative abnormal returns on the day of the announcement as well as on the days immediately surrounding the announcement. Furthermore, as predicted, when isolating only those cases related to fraud, abnormal returns become more negative than both the sample as a whole as well as insider trading. This implies that the market considers misconduct involving fraud more severe. Insider trading exhibits consistently negative returns on the event day and surrounding days, however these returns lack significance. Contrary to earlier research, our findings exhibit no evidence of under-reaction surrounding the release of initial allegations of corporate misconduct, instead revealing an immediate and instantaneous reaction by the market in support of the efficient market theory. The results of the regression analysis confirm the significant negative impact of fraud for the days surrounding the announcement day, and al...