How Stock Markets React to Financial Institution Misconduct: The Role of Ex Ante Reputation

Prior studies show that financial institutions (FIs) engaging in misconduct experience a loss in equity value when regulatory sanctions are publicly announced. These studies rely on datasets for which highly prestigious FIs are overrepresented, however, which may distort the findings. This article addresses this concern by ex ante classifying FIs according to their ex ante reputation. Applying an event-study methodology and the Fama-French model, the authors find that although less-prestigious FIs do not experience a loss in equity value after the announcement of their misconduct, highly prestigious FIs do. They also find a loss in equity value only in misconduct cases with large penalty amounts.