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Forgive me all my sins: How penalties imposed on banks travel through markets

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  • Flore, C.
  • Degryse, H.
  • Kolaric, S.
  • Schiereck, D.

Abstract

From 2005 to 2015, the 25 largest global financial institutions paid combined more than $285 billion in legal penalties. We examine the reaction of banks' stocks, bonds, and credit default swaps to the announcements of monetary penalties. We observe a reduced default risk and lower financing costs, as well an increase in the stock market valuation, suggesting that banks benefit from settling lawsuits. The positive reaction is likely driven by the resolution of uncertainty surrounding these proceedings. While the sued bank's systemic risk increases in the size of the relative monetary penalty, we also document positive spillover effects to other banks facing pending lawsuits with the same plaintiff, demonstrating the systemic effect of law enforcement against banks. Furthermore, banks appear to correctly anticipate penalties, as they are cash flow-effective but not income-effective in the year they are announced.
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  • Flore, C. & Degryse, H. & Kolaric, S. & Schiereck, D., 2021. "Forgive me all my sins: How penalties imposed on banks travel through markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 125507, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:125507
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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