Forced Remediation: The Use of Corporate Monitors following Financial Misconduct

• In Event: Governance and Managerial Ability

Abstract

The SEC and the DOJ require a set of firms to retain corporate monitors as a part of pretrial settlement agreements following financial misrepresentation. We find that enforcement actions with bribery allegations and a greater number of violations are strong predictors of corporate monitor assignment. Moreover, firms that announce an internal investigation, terminate culpable executives, and have higher analyst following are less likely to be assigned a monitor. Next, we investigate the substitutability between corporate monitors and firm monetary penalties as regulatory enforcement outcomes. We find no evidence that the monitorship requirement reduces firm monetary penalties. Rather, we find a robust positive association between monitors and firm monetary penalties after controlling for the severity of the misconduct. Lastly, we find some evidence that auditors reduce audit fees to a greater extent for enforcement firms with monitors compared to those without monitors.

Authors

• Rebecca Lynn Files, University of Texas at Dallas

• Gerald Martin, American University

• Yan (Tricia) Sun, Central Michigan University