Drawing upon rational choice and investor attention theories, the authors examine how accusations of corporate bribery and subsequent investigations shape market reactions. Using event study methodology to measure loss in firm value for public firms facing bribery investigations from 1978 to 2010, the authors found that total market penalties amounted to $60.61 billion.
The authors ran moderated multiple regression analysis to examine further the degree to which the unique characteristics of bribery explain variations in market penalties. Companies committing bribery in less corrupt host countries and with the involvement of compromised executives experienced greater market penalties than did other companies. After partitioning share value losses into components for regulatory penalties, class action settlements, and loss to reputation, the authors found that reputational penalties account for 81.8¢ of every dollar of share value loss. Omission of reputational penalties in rational choice calculus underestimates bribery costs by 4.5 times. The results suggest that firms should not underestimate the importance of market-imposed reputational penalties by merely considering regulator-imposed fines and sanctions.
- Corporate Reputation’s Invisible Hand: Bribery, Rational Choice, and Market Penalties door Vijay S. Sampath, Naomi A. Gardberg, Noushi Rahman in Journal of Business Ethics