Enforcement Waves and Spillovers

We document that regulatory enforcement actions for financial misrepresentation cluster in industry-specific waves and that wave-related enforcement has information spillovers on industry peer firms. Waves and spillovers have significant effects on share prices. Early wave target firms have the largest short-run losses in share values and the largest information spillovers on industry peer firms. Late wave targets’ short-run losses are smaller, but not because they involve less costly instances of misconduct. Rather, late wave targets are subject to more information spillovers from earlier in the wave. These results indicate that prices incorporate changes in the likelihood a firm will face wave-related enforcement action for financial misconduct. Short window share price losses understate the total share price impact, particularly for firms whose financial misrepresentation is revealed late in an enforcement wave.