Causal Evidence on the Effects of Enforcement Investigations

• In Event: Regulatory Effects

Abstract

We provide causal evidence on the effects of financial reporting enforcement investigations. Using a proprietary data set on randomly selected and risk-based selected enforcement investigations of listed German firms from 2005 to 2018, we find that risk-based selected firms face a significant abnormal reduction in daily returns of -9.5 basis points during enforcement investigations. Randomly selected firms, however, do not show significant changes in firm value during investigations. Consistently, we find that risk-based selected firms are less transparent during investigations, and change their financial reporting behavior, whereas randomly selected firms show no change in transparency or financial reporting behavior. Overall, our study suggests that the negative firm-level outcomes of enforcement investigations as shown by prior research are likely a result of the selection process. When we avoid the endogenous selection and focus on randomized investigations, we document that firms are largely unaffected.

Authors

• Marius F. Gros, Universität Bremen

• Martin Nienhaus, Goethe University

• Christopher Oehler, Goethe-University Frankfurt