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Stock market reactions to corporate misconduct: The moderating role of legal origin

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  • Erragragui, Elias
  • Peillex, Jonathan
  • Benlemlih, Mohammed
  • Bitar, Mohammad

Abstract

Does a country's legal regime shape stock market reactions to corporate misconduct? In the presence of conflicting legal views, efficient regulation through sanctions and deterrence is difficult to establish. Using data from 2164 environmental, social, and governance controversies over the 2010–2015 period, we examine whether the legal regime in which firms operate shapes stock markets reactions to announcement of corporate controversies. We find a larger and consistent stock market correction following corporate misconduct announcements among firms headquartered in civil law countries. As such, we report a greater correction under Scandinavian legal regime that is robust when controlling for endogeneity, self-selection, and country- and firm-level controls. Presence of litigation eliminates the incremental penalty of the civil law while higher internal and external monitoring exacerbates it. Our findings support the optimal penalty theory, in which stock market sanctions are viewed as complementary reputational penalties that balance the limits of legal enforcement mechanisms.

Suggested Citation

  • Erragragui, Elias & Peillex, Jonathan & Benlemlih, Mohammed & Bitar, Mohammad, 2023. "Stock market reactions to corporate misconduct: The moderating role of legal origin," Economic Modelling, Elsevier, vol. 121(C).
    • Handle: RePEc:eee:ecmode:v:121:y:2023:i:c:s0264999323000093
    DOI: 10.1016/j.econmod.2023.106197
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    More about this item

    Keywords

    Event study; environmental; social; and governance controversies; Stock prices; Legal origin; Reputational penalty;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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