The enforcement division of the Securities and Exchange Commission brings between 400 and 500 civil enforcement actions every year for violations that include insider trading, manipulating market prices, stealing funds or securities, breaching fiduciary responsibility, conducting brokerage activities unfairly, selling securities without proper registration, accounting fraud and releasing false or misleading information about a company and its securities.
And yes, it's no secret that SEC lawsuits have a negative impact on the share price. But are some violations worse than others? Is there a difference between litigation being settled with fines and without? What happens if it's just left pending?
These questions and more are answered in a paper from Gulnur Muradoglu from City University in London and Jennifer Clark Huskey from Coulter and Justus Financial Services in Tennessee.
Their paper, The impact of SEC litigation on firm value examined 269 litigation events involving 296 companies for breaches of insider trading, improper accounting, violations of SEC procedures or guidelines and fraud. They found that the market reacts quickly but necessarily with the same impact. It depends on the circumstances.
When, for example, litigation is announced by many different sources, such as the SEC, The Wall Street Journal and company websites, there is a smaller negative effect on the share price than when it's announced by the SEC alone. Litigation that is settled with fines has a bigger impact on the share price than litigation that's settled without a fine. The findings also suggested that companies that communicated with the market regarding their enforcement cases were treated more favorably than those that didn't.
They also found that markets were able to differentiate between what investors considered to be major and minor infringements. Companies in trouble for fraud and insider trading were punished. But investors seemed to have more tolerance for procedural violations and improper accounting.
The hidden message in the paper is that the SEC's enforcement regime rates highly with investors. "The negative reaction of market participants to SEC enforcements, indicates that investors see value in the enforcement action,'' the authors write. "Therefore, SEC enforcement litigation has important implications such as compliance, deterrence, and possibly increased confidence in capital markets leading to increased efficiency."
http://www.soxfirst.com/50226711/sec_litigation_and_share_price.php
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1094948
