DO FINANCIAL MARKETS DISCIPLINE FIRMS FOR ILLEGAL CORPORATE BEHAVIOUR?

Transcription

1 DO FINANCIAL MARKETS DISCIPLINE FIRMS FOR ILLEGAL CORPORATE BEHAVIOUR? Monique ARNOLD, Peer-Jan ENGELEN Urech Universiy, The Neherlands Absrac. This paper examines he relaionship beween he discovery of illegal behaviour by companies on he sock price. I examines wheher shareholders care abou illegal corporae behaviour and punish companies by driving he sock price down. The empirical resuls show ha sock prices reac negaively on he announcemen dae of corporae malfeasance. We examine differen impacs of he ype of illegal behaviour, he level of misconduc, he phase and he magniude. Keywords: even sudy, fraud, illegal behaviour, insider rading, repuaional effec. 1. Inroducion Responsible corporae behaviour received a lo of aenion during he las decade in he CSR lieraure. Afer he U.S. financial markes being roubled in 2002 by several major scandals, involving companies like Enron and Tyco, financial ehics received a lo of aenion by a much broader public. This paper examines he relaionship beween he discovery of illegal behaviour of lised companies and heir sock price. I examines wheher shareholders care abou corporae misconduc and punish companies by driving down he sock price. And if so, how heavy does he marke penalise his behaviour? 2. Research design 2.1. Hypoheses This sudy examines he effec of he announcemen of illegal corporae behaviour on sock prices. The examined ypes of illegal behaviour are insider rading, corrupion, ax fraud, accouning fraud and a residual group (e.g. hef or employee enrichmen). Three oher dimension are examined as well. Firs, i is examined wheher here is a differences if he illegal behaviour has a direc impac on he firm s profis or boom-line (inrinsic value) or on shareholders rus (indirec impac). Second, he impac of he scope of he illegal behaviour is examined. Is here a difference beween malfeasance a company-level or a he corporae agen level (employee or manager)? Third, he sudy looks ino differences of he phase of he corporae misconduc. Is here a difference beween jus a rumour and a more formal invesigaion, such as a police invesigaion or a liigaion phase?

2 Managemen & markeing We define he following four hypoheses: Hyp.1 Sock prices of lised firm show a negaive abnormal reurn upon he announcemen of he corporae misconduc This hypohesis is esed for all caegories of malfeasance. Is here a significan difference beween he effecs of differen caegories on he sock prices? Do shareholders penalise cerain ypes of malfeasance harder han oher ypes? Or, maybe no a all? Hyp.2 A value-impac corporae misconduc exhibis a larger negaive abnormal reurn of sock reurns han a malfeasance wih only an impac on he rus of shareholders This hypohesis examines difference in he impac of corporae malconduc which has a direc impac on he value of he firm such as accouning fraud and illegal behaviour which has no direc impac on firm s profi (e.g. insider rading by he CEO). We expec a larger negaive abnormal reurn of sock reurns for value-impac corporae malconduc. Hyp.3 Corporae misconduc a he firm level has a larger negaive abnormal reurn han a he individual level Corporae misconduc can occur boh a he individual level as well as a he firm level. We can expec he cos of malfeasance a he corporae level o be accouned o he firm and hereby o he shareholder level. Legal fees, penalies, loss of cusomers, increased regulaion and so on have a direc impac on he firm s profis and herefore on shareholders reurns. The cos of misconduc a he individual level are borne by he involved employees only. We herefore expec a larger negaive abnormal reurn of sock prices of illegal corporae aciviies a firm level. Hyp.4 The furher corporae malfeasance is along he formal invesigaion procedure, he larger he abnormal negaive reurn This hypohesis examines hree differen phases: rumour, police invesigaion and cour phase. We expec he impac of rumour o have a smaller informaion conen o invesors since he rue naure of he malfeasance is sill highly uncerain. The furher down he formal invesigaion and cour phase he informaion of he announced illegal behaviour is, he higher he price impac Sample descripion The paper examines he impac of he public announcemen of 57 illegal corporae aciviies in he period 1994 ill 2003 in financial press (He Financieele Dagblad, De Financieel Economische Tijd) on sock prices of Belgian and Duch companies lised on Euronex Brussels and Euronex Amserdam. The paper examines if he announcemen exhibis any abnormal reurn behaviour on he announcemen dae by means of an even sudy. Furhermore, i is examined wheher he marke s response 104

3 Do financial markes discipline firms for illegal corporae behaviour? lags by examining he cumulaive abnormal reurns over a period of weny rading days afer he announcemen (pos-announcemen drif) Even sudy mehodology To evaluae he impac of he public announcemen of corporae malconduc, an even-ime sudy is used. An even sudy examines if he average abnormal reurn on he even day is equal o zero (null hypohesis) versus an alernaive hypohesis of a non-zero abnormal reurn: H 0 : AARE = 0 [1] H 1 : AARE 0 The average abnormal reurn (AAR E ) on he even day is he aggregaion of he individual sock abnormal reurns aligned in even ime: N 1 AARE = AR i [2], E N i= 1 On he even day and on weny rading days before and afer he announcemen, resuling in a 41-day even window, abnormal reurns are being calculaed o examine reurns behaviour around he even dae. Individual sock abnormal reurns (AR i, ) are measured as he difference beween he realized or acual reurn on he even day (R i, ) and he expeced reurn E[R i, ], which is he benchmark normal reurn in he absence of he even. Several mehods exis o esimae he expeced reurn of he socks. This sudy uses he marke adjused model and he marke model for an esimaion of he benchmark expeced reurn for each individual sock. The expeced reurn of a sock in he marke-adjused model is he curren marke index reurn. This model hus uses no informaion from ouside he even window o calculae abnormal reurns during he even period. Marke model abnormal reurns are calculaed as AR i, = Ri, ( aˆ i + bˆ i Rm, ) [3] where ^ denoes he OLS-esimaes from he marke model: R i, = ai + bi Rm, + e [4] i, wih R i, = he reurn of sock i in period ; R m, = he marke index reurn in period ; a i, b i = inercep and slope coefficien of he marke model (sock-i-specific and ime-independen parameers); e i, = random disurbance erm of he marke model for sock i in period. In order o calculae marke model abnormal reurns informaion from ouside he even window is used. The parameers of he marke model are esimaed over a period from 220 o 21 rading days before he even day. The significance of mean abnormal reurns is firs esed using he sandard Brown and Warner (1985) es saisic assuming cross-secional independence, which sandardizes abnormal reurns for each sock by is sandard deviaion calculaed from he esimaion period. Significance is also esed by using a non-parameric Mann-Whiney-Wilcoxon es. 105

4 Managemen & markeing 3. Empirical resuls The empirical resuls show ha sock prices reac negaively on he announcemen dae of he illegal aciviy (on average for he full sample a marke-adjused abnormal reurn of 0.94% and an abnormal marke model reurn of 0.86%) (see day [0] in Table 1). On day [+1] an addiional negaive abnormal reurn of -1.03% is found. The immediae announcemen effec seems quie small, alhough we observe a declining abnormal reurn over he firs weny rading days. Ineresingly, he announcemen of insider rading did no reveal a significan abnormal reurn on he announcemen dae (Table 2). This is sriking since he repuaional effec of insider rading is ofen cied as an argumen agains his ype of behaviour (Engelen, 2003). Do shareholders no care? Or is heir reacion very slow? Tables 2 o 4 repor he marke reacion o he announcemen of he differen ypes of corporae misconduc. Illegal aciviies wih a direc impac on he boom line show a higher abnormal reurn impac han he caegory of indirec impac on he firm s repuaion. Illegal behaviour a firm level shows greaer impac han a he individual level. Announcemen of illegal aciviies in he judicial phase show greaer impac han jus rumours in financial press. 4. Conclusions The resuls show a cumulaive abnormal reurn of abou 2% for [0,+1]. This resuls hides differences for he sub samples. There was hardly any reacion of invesors wih respec o corrupion news. The insider rading and ax fraud news shows a very small reacion on day [0] and a larger, delayed reacion on day [+1]. Invesors seem o anicipae news on accouning fraud as an abnormal reurn of % is found on day [-2]. Fuure research will fine-une he above resuls by expanding he sample, by comparing a larger sample of counries, by looking a long-erm effecs and changes in he risk profile of companies. I will focus on he impac and consequences of he resuls for business ehics and corporae ehical risk managemen. References Cloniger, D. (1985) An Analysis of he Effec of Illegal Corporae Aciviy on Share Value, Journal of Behavioral Economics, 14: 3-31 Davidson, W. and D. Worrell (1988) The Impac of Announcemens of Corporae Illegaliies on Shareholder Reurns, Academy of Managemen Journal, vol. 31, Eicher, A., M. Locke and R. Rao (1996) The Impac of Illegal Business Pracice on Shareholder Reurns, Financial Review, 31: Engelen, P.J. (2003), Can Repuaional Damage Resric Illegal Insider Trading?, European Journal of Crime, Criminal Law and Criminal Jusice, 11 (3): Rao, S. and J.B. Hamilon III (1996) The Effec of Published Repors of Unehical Conduc on Sock Prices, Journal of Business Ehics, 15:

5 Do financial markes discipline firms for illegal corporae behaviour? Abnormal reurn behaviour for he enire sample Table 1 107

6 Managemen & markeing Abnormal reurn behavior for he Insider Trading subsample Table 2 108

7 Do financial markes discipline firms for illegal corporae behaviour? Table 3 Abnormal reurn behavior for he Corrupion sub-sample 109

8 Managemen & markeing Table 4 Abnormal reurn behavior for he Tax Fraud sub-sample 110

9 HUMAN RESOURCE MANAGEMENT IN CHANGE ONE REASON: THE EUROPEAN UNION Hannah HERLEMANN Real Inernaional Holding, Germany Absrac. Times are moving fas, especially if poliical changes are coming up. Romania s accession o he European Union is followed by several changes in he Human Resource Managemen; in Romania iself, bu also in he oher EU counries. Employees are moving beyond borders o work abroad and need o be caugh and imbedded in he new working environmen. Moivaion is an imporan issue, bu also oher appeals for qualified saff o decide upon he move ino a foreign European counry. Furher of imporance is he inegraion and herefore new demands for he Human Resources Managemen, of he non naive new employees. Dangers and misakes ha occur due o wrong inegraion and culural misundersandings may harm he good inensions of cross-counry and -culural working. Key words: human resource managemen, inernaional work. 1. Inroducion Romania and Bulgaria joined he European Union by January 1 s of 2007, ha means skm (or 8,7% of he oal surface) have been added o he surface of he uniy of saes and an addiional 29,7 million ciizens (6,5%) whereof 65% - 70% are poenial new employees in all oher EU saes (depending on reiremen age). (Alvarez-Plaa, 2003). Persons ha may have he inenion o leave heir home counry o work wihin he EU, bu also over 300 million people of all oher EU saes ha could poenially work in Romania, a reciprocal possible movemen. In his conex i is very imporan o reflec ha he possible moving can include a dislocaion or adjusmen of he righ people a he righ locaion. The EU growing includes also new markes and new sraegic arges and approaches. Locaions, workplaces and fabrics can be moved due o he EU growing, specialiss, bu also normal workers migh be needed in new places, manpower as well as knowledge has o be presen in anoher place. To underline his aspec a bi more, following influencing facors shall be menioned, which play quie an imporan role in he manpower requiremens planning afer EU enlargemen. Exernal influences for manpower requiremens: demographic developmen; economics facors; seasonal differences; compeiive behavior; changes in he marke srucure; poliical developmen; changes in labor- and social laws; echnological improvemen (Nicolai, 2006). The EU accession is definiely o be seen as a par of he poliical developmen, as well as oher globalizing inenions, which can lead o oher needs of manpower requiremens bu also personnel layoff. Oher quie easy o undersand facors are he seasonal differences and changes in he marke srucure which can lead o he need of shifing personnel o oher locaions. Inernal influences are he following: reformaion of workflows; deeper producion circles; improvemen in communicaion- informaion-