Do Financial Markets React to Regulatory Sanctions? Evidence from France

Friday, 3 July 2015: 4:00 PM-5:30 PM
TW1.1.03 (Tower One)
Thierry Kirat, IRISSO / CNRS - University PARIS DAUPHINE, Paris, France
Amir Rezaee, Associate Professsor, Paris, France
Abstract :

Several recent research papers in economics and management focus on the reputational effects of regulatory sanctions. Among these studies one can quote Armour, Mayer and Polo (2011) on the U.K. and Djama (2013) on France. The latter focuses exclusively on the case of disclosure of false financial information.

Our proposed original paper draws on the literature: it aims at assessing the plausible reputational effects of regulatory sanctions issued by the French financial regulator (Autorité des marchés financiers henceforth AMF) without restricting the scope of fraud and misconduct. Through a comprehensive approach, we have created a data base encompassing the whole range of fraud and misconduct that has been subjected to the sanctions of the AMF.

Thanks to an exhaustive hand collected dataset of sanctions imposed by the AMF from 2004 to 2013, complemented by data on stock prices, we have conducted an abnormal return event study on banks and financial firms involved in AMF Sanctions proceedings.

Implementing event study methodology has enabled us to test empirically three hypotheses:

H1: Market reacts negatively to the opening of an investigation

H2: Market reacts negatively to the announcement of a regulatory sanction

H3: Market reacts negatively to the press announcement of a sanction

The results show that, though the financial market does not react to the announcement of a regulatory sanction, negative abnormal returns are observed just after the opening of an investigation by the AMF and after the press announcement of a sanction. The paper will expand on the policy issues for effective financial regulation.