Corporate Scandals and Regulation

Corporate Scandals and Regulation

Luzi Hail, Ahmed Tahoun, Clare Wang

Series number :

Serial Number: 
367/2017

Date posted :

October 15 2017

Last revised :

October 19 2017
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Keywords

  • Accounting fraud • 
  • Corporate Scandals • 
  • Capital market regulation • 
  • Economics of regulation • 
  • law and finance • 
  • International accounting

Are regulatory interventions delayed reactions to market failures or can regulators proactively pre-empt corporate misbehavior? From a public interest view, we would expect “effective” regulation to ex ante mitigate agency conflicts between corporate insiders and outsiders, and prevent corporate misbehavior from occurring or quickly rectify transgressions.

However, regulators are also self-interested and may be captured, uninformed, or ideological, and become less effective as a result. We develop a historical time series of corporate (accounting) scandals and (accounting) regulations for a panel of 26 countries from 1800 to 2015. An analysis of the lead-lag relations at both the global and individual country level yields the following insights: (i) Corporate scandals are an antecedent to regulation over long stretches of time, suggesting that regulators are typically less flexible and informed than firms. (ii) Regulation is positively related to the incidence of future scandals, suggesting that regulators are not fully effective, that explicit rules are required to identify scandalous corporate actions, or that new regulations have unintended consequences. (iii) There exist systematic differences in these lead-lag relations across countries and over time suggesting that the effectiveness of regulation is shaped by fundamental country characteristics like market development and legal tradition.

Authors

Real name: 
Research Member
The Wharton School, University of Pennsylvania
Real name: 
Ahmed Tahoun
Real name: 
Clare Wang