Search

SUMMARY: Prior research provides some evidence that strict corporate monitoring constrains financial misreporting. We examine whether the efficacy of various corporate monitoring mechanisms hinges on the nature of accounting standards—rules-based standards (RBS) versus principles-based standards (PBS)—in place. We generally document that the negative association between the likelihood of misstatements and tough monitoring by audit committees, boards, external auditors, and the SEC is more pronounced under RBS than under PBS. This evidence collectively suggests that most corporate gatekeepers fulfill their monitoring obligations primarily through ensuring better compliance with detailed standards when the applicable standards are more specific and leave less room for discretion. Although some prior studies document higher financial reporting quality under PBS, our results imply that it is important for regulators to also consider the potentially higher monitoring efficacy under RBS when setting accounting standards. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40; M42. [ABSTRACT FROM AUTHOR]

How should courts address class action securities cases arising from non-accounting related fraud, e.g., catastrophic events or illegal conduct? A recent article published in this journal proposed creating a different model for “event-driven” cases, essentially compelling plaintiffs to not just plead, but to statistically demonstrate at the pleading stage the materiality of misconduct; and to do so by determining what would have been the stock price impact had defendant remained silent rather than spoken deceptively. In further support of this model, the authors propose jettisoning altogether the “half-truth” and “price maintenance” doctrines. This article critiques this paradigm-shifting model, and seeks to demonstrate not only that it is contrary to well-reasoned case law, but that it also ignores the significant impact a company’s “reputation” for integrity and reliability has upon its stock price. Empirical studies have shown that reputation contributes at least 50 percent to a company’s stock price, and that damage to reputation causes upwards of 66 percent of stock price declines upon revelation of wrongdoing. As such, “reputation” should be considered in any analysis of materiality, causation, and damages. [ABSTRACT FROM AUTHOR]

This article features forthcoming article including "Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles," by Lucy F. Ackert, Narat Charupat, Richard Deaves, and Brian D. Kluger, "Paying for Market Quality," by Amber Anand, Carsten Tanggaard, and Daniel G. Weaver, and "Term Structure, Inflation and Real Activity," by Andrea Berardi.

This Article examines how the two blind spots of economics--markets and the interior of firms--combined over the past 40 years to create the modern corporate governance regime. The focus of corporate law reformers over the past four decades on achieving ex-post welfare outcomes ignored the traditional centrality of supporting ex-ante market behaviors in corporate law. Corporate law was originally designed from the bottom up to promote the activities of bargaining, experimentation, and competition. None of these activities are currently much in evidence around the governance of public companies. The current corporate governance regime has not succeeded, even on its own terms, and it has seriously damaged the relevant markets. This Article joins a trend in recent legal scholarship of pointing out the intrinsic social value of market activities and their importance in making sense of legal doctrine. Economic efficiency arises from market activities like bargaining and experimentation that are, themselves, inefficient. The modern corporate governance regime has forgotten this fact. [ABSTRACT FROM AUTHOR]

Event-driven securities suits—ones that arise after an issuer has experienced some kind of disaster—have become increasingly prevalent in recent years. These suits are based on the fraud-on-the-market doctrine, a doctrine that ultimately gives rise to the bulk of the damages paid out in settlements and judgments pursuant to private litigation under the U.S. securities laws. The theory behind fraud-on-the-market cases is that when an issuer’s share price has been inflated by a Rule-10b-5-violating misstatement, investors who purchased shares at the inflated price have suffered a compensable injury if they still hold the shares after the inflation is gone. Although these event-driven suits differ in important ways from their more traditional cousins based on the same doctrine, they constitute a kind of stress test for the overall doctrine. The growth of event-driven cases thus provides a unique opportunity to reconceptualize the overall system of adjudicating fraud-on-the-market suits more generally. In this Article, we identify the basic logic behind this cause of action and consider what that logic implies as to when liability should and should not be imposed from a social welfare perspective. The result suggests ways we can both solve the challenges posed by event-driven litigation and improve fraud-on-the-market jurisprudence more generally. In an event-driven case, the plaintiff points to a pre-disaster statement that allegedly underplayed the likelihood that the disaster would occur and argues that the disaster announcement was the corrective disclosure. But in these cases, the price drop on the day of the disaster announcement is almost never a reasonable measure of the misstatement’s share price inflation. By focusing on the price drop at the time of a corrective disclosure, as courts generally do in fraud-on-the-market suits, they have lost track of the real issue: whether the misstatement inflated the share price by a meaningful amount in the first place. More often, the answer to that question is better indicated by the price change back at the time of the misstatement. For all fraud-on-the-market suits where the plaintiff can establish a misstatement made with scienter, we argue that liability should be imposed where the misstatement’s price impact appears to be at least as great as an inflation threshold chosen to trade off the costs and benefits of adjudicating securities class actions. Liability should not be imposed where both the misstatement’s price impact appears to be smaller than this inflation threshold, and the market would not have drawn negative inferences had the issuer stayed silent instead of making the misstatement. Where the misstatement’s price impact is less than the inflation threshold, but the market would have drawn negative inferences from issuer silence, liability should be imposed if and only if both the corrective disclosure’s price impact is a reliable proxy for how much the misstatement inflated the share price and this impact appears to be at least as great as the inflation threshold. [ABSTRACT FROM AUTHOR]

This paper shows that a firm's likelihood of committing corporate fraud is affected by the local information environment. We use the density of local bank branch networks as a proxy for the local information environment. We show that denser bank branch networks increase the likelihood of fraud detection, accelerate the detection of fraud, and decrease the fraud propensity of local firms. Our results cannot be explained by the clustering of firms in urban areas, geographic proximity to regulators, or other location effects. Overall, our study identifies a spatial dimension in the detection and prevention of corporate fraud. [ABSTRACT FROM AUTHOR]

What has boosted crowdfunding's growth? In the case of peer-to-peer (P2P) lending, we highlight the role of consumers' distrust in banks. We offer evidence that distrust in banks likely triggers individuals to supply funding toward crowdfunding and away from bank deposits. We highlight that a distrust mindset promotes questioning default choices and considering alternatives, and fosters comparisons focusing on dissimilarities. Our findings suggest US states whose residents express greater distrust in banks are more likely to fund P2P loans and, conditional on funding, lend higher amounts. This relationship is more pronounced when funding small loans or borrowers with less banking access. [ABSTRACT FROM AUTHOR]

A criminal injustice system cannot rediscover its promise for justice without invigorating corporate criminal responsibility. However, maximizing corporate punishment is not a path to justice because policymakers must make choices about how much to invest in increased detection of corporate crime, warnings, persuading voluntary commitment to repair harm to victims, deferred prosecution agreements, in addition to increased prosecutions. Funding can shift from carceral punishment of crimes of the powerless to support all these forms of intervention.1Ultimately, such transformation might be self-funded by improved tax compliance and reduced corporate sabotage of economic futures by the destruction of ecosystems. When all this is done as a coherent mix, corporate criminal responsibility can contribute profoundly to a good society. This Article develops the idea of minimally sufficient deterrence by building on Brent Fisse's accountability principle for corporate offenders-all who are responsible should be held to account-whether they are individual executives, sub-units of corporations, auditors, ratings agencies, corporations that are criminal actors, or other implicated firms upstream or downstream. [ABSTRACT FROM AUTHOR]

The article attempts to spur discussion and thought by regulating corporate wrongdoing in the absence of corporate criminal law. Topics discussed include the suite of liability regimes that would still be in place if there is no corporate criminal liability, the blaming and message-sending functions of corporate criminal law and what can be gained if there were no corporate criminal liability.

The debate over corporate criminal liability has long involved a fight between proponents who argue that corporate liability is necessary for effective deterrence and opponents who claim that it "punishes the innocent." This Article agrees and disagrees with both sides. Corporate criminal liability could play a critical role in establishing an effective deterrent to organizational misconduct, but today it largely fails. Currently, we have a system that combines Deferred Prosecution Agreements, Non-Prosecution Agreements, and extraordinarily generous sentencing credits for compliance plans that have failed, and the result is a system that is more carrots than sticks. The evidence seems clear that corporate fines seldom affect the company's stock price (even when they are record penalties), that companies rarely self-report their misconduct (despite legal incentives to do so), and that courts impose penalties that can be easily absorbed as a cost of doing business. This analysis leads many to favor a system that focuses only on corporate executives and dispenses with the corporation as a target of the criminal law. Unfortunately, that approach has even higher costs. Although executives are deterrable, high-ranking corporate executives are much harder to identify and prosecute for a variety of reasons. In this light, the critical role of corporate criminal liability is that it gives the corporation a stronger incentive to self-report, monitor its employees, and turn in those responsible. But this requires that we extend leniency only for objective conduct that generates deterrence. A principal goal of this Article is to provide a roadmap for how we can make the punishment fit the corporation. Leniency can be used as a tool but should not be extended gratuitously. To curb corporate misconduct, society has long faced a choice between either vicarious liability for executives (which is contrary to our legal tradition and would shock civil libertarians) and vicarious liability for shareholders (which has existed for over a century but is always bounded by the ceiling of limited liability). Either choice has its costs, and this Article suggests some possible alternatives. [ABSTRACT FROM AUTHOR]

This Article, for a collection in which authors were asked to "imagine a world without corporate criminal liability," specifies the material questions that should be addressed if debate about the doctrine is to progress past longstanding and oft-repeated assertions. The strongest case for corporate criminal liability is based on the potential for its unique reputational effects to contribute to the prevention and deterrence of crime within corporations. Further research should take up a variety of unanswered questions about those effects having to do with mechanisms and audiences. The relevant inquiries are both theoretical and empirical. Answers will lie in further understanding of organizational and individual behavior more than in familiar models of the firm and deterrence that have largely shaped the literature to date. [ABSTRACT FROM AUTHOR]

This paper considers a financing problem for an innovative firm that is launching a webbased platform. The entrepreneur, on one hand, faces a large degree of demand uncertainty on his product and on the other hand has to deal with incentive problems of professional blockchain participants who contribute to the development and sales of the product. We argue that hybrid tokens can be a better option for the firm compared to straight utility tokens or security tokens because they help the firm better deal with both the moral hazard problems (via profit sharing incentives) and demand uncertainty (they help the firm learn the market demand for the product). This finding is consistent with some recent evidence. The paper also generates new predictions regarding the effect of different variables on the choice of financing method that have not yet been tested. [ABSTRACT FROM AUTHOR]

Recently, debt structure research has started focusing on the strategic perspective of financing choices, particularly to understand the reasons for debt specialization (DS). This paper examines trends of specialization over time and industry by using a comprehensive dataset on types of debt employed by the public limited companies during 2009-2018. The objective of the current study is to analyze the effect of debt market conditions by identifying significant predictors of DS. Time-series and cross-sectional results confirm the existence of DS, which is further validated by the findings of the cluster analysis. The empirical results indicate that overall, 61% of the companies solely rely on a single type of debt, mostly on short-term obligations accompanied by long-term secured and other debts. Moreover, small, mature, rated, group-affiliated, and low-leverage companies incline more towards this strategy. Credit rating, debt maturity, financial and interest coverage ratios serve as the primary determinants of the debt market that are significantly associated with the measures of DS. The results contribute to the capital structure literature by specifying that financing choice has an important implication in deciding the debt structure composition of the organizations. [ABSTRACT FROM AUTHOR]

The issue of capital structure in an enterprise is often described in the literature on the subject; however, theories are classified into various approaches, and their characteristics are often limited to selected theories. This work is an attempt at a synthetic presentation of the theory of capital structure. The aim of the article was to review and try to organise the most important theories of capital structure, paying attention to the influence of capital structure on the processes of creating value. The paper also highlights the most important theoretical works in this area. The study consists of two main parts. The first part indicates the diversity of defining the concepts of capital structure and indicates the approaches in classifying this structure. The second part characterises the theories of capital structure in the context of value creation. Based on the presented theories, it can be stated that there is no agreement as to whether and to what extent capital structure translates into the process of creating enterprise value. Therefore, it seems justified to conduct appropriate empirical research in this respect. [ABSTRACT FROM AUTHOR]

The article examines the policies for relief and rescue within the theorization of legal elasticity in Katharina Pistor's legal theory of finance. Topics discussed include relief and rescue policies in the U.S., Great Britain and the European Union, impact of debt expansion on corporations and households, and methodological framework for mapping long-term policy and reform considerations that address the adverse consequences of corporate and household fragility.

Corporations prefer to avoid guilty pleas in favor of more lenient resolutions, partly due to the greater reputational damage supposedly associated with a guilty plea. When possible, some corporations also prefer sanctions against their employees over sanctions against corporate entities themselves, similarly due to reputational reasons. However, it is unclear whether the form of the final resolution and the entity under investigation actually affect public perceptions of a corporation accused of criminal misconduct. Using a series of public opinion survey experiments, this study finds that in the United States, (1) a guilty plea and a non-prosecution agreement similarly affect public perceptions of corporations, but (2) corporate misconduct has a larger negative effect on public perceptions of a corporation than individual misconduct by corporate executives. However, in South Korea, such factors regarding U.S. criminal sanctions make little difference in consumer perceptions of a corporation. These findings suggest that a corporation under investigation by U.S. authorities should attempt to resolve the investigation by shifting criminal liability to its employees to reduce the domestic reputational cost, but it should not be as concerned about the reputational impact of U.S. criminal sanctions on East Asian consumers. [ABSTRACT FROM AUTHOR]

Research linking marketing to financial performance has predominantly focused on how marketing assets and actions add value. The authors argue that it is equally important to understand how marketing decisions can reduce firm value. Prior research has indicated that negative events vary greatly in their indirect costs to the firm. On the basis of established theory and in-depth interviews with practitioners, the authors identify a set of factors that can explain the heterogeneity in the magnitude of indirect costs associated with negative marketing-related events. Specifically, they address how the regulatory exposure of deceptive marketing, which carries no direct cost to the firm, affects shareholder value. Using an event study, the analysis shows that incidents of exposed deceptive marketing are associated with significant, negative abnormal returns amounting to a drop of 1%, which translates into a wealth loss of $86 million for the median-sized firm in the sample. In explaining the variation in magnitude of the impact between events, the authors find that, in general, event characteristics are more significant than firm and brand characteristics. When deception is highly egregious or directed at vulnerable populations, firm value is more negatively affected than when the potential to mislead and harm is not readily verifiable. Furthermore, when the cited product has substantial brand market share, the levels of egregiousness and target audience explain substantially more of the variation in event impact than when brand market share is low. The results are robust to alternative stock-portfolio-based measures of abnormal returns, model specification, heteroskedasticity, and examination of risk. The authors' framework and analysis have implications for Wall Street executives, Main Street managers, academic researchers, and public policy makers. [ABSTRACT FROM AUTHOR]

In this paper, we examine how stock option usage affects total corporate payout. Using fixed-effects panel data estimators on various samples of ExecuComp firms from 1993 to 2005, we find the higher the executive stock options, the lower the total payout, ceteris paribus. We also find some evidence that firms increase payouts through repurchases in order to offset earnings per share dilution that occurs due to usage of executive and non-executive stock options. However, incentives from not having dividend protection for options appear to dominate those from antidilution, resulting in lower total payout for firms with higher options usage. [ABSTRACT FROM AUTHOR]

We examine the penalties imposed on the 585 firms targeted by SEC enforcement actions for financial misrepresentation from 1978-2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only $23.5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty--which we define as the expected loss in the present value of future cash flows due to lower sales and higher contracting and financing costs--is over 7.5 times the sum of all penalties imposed through the legal and regulatory system. For each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $3.08. Of this additional loss, $0.36 is due to expected legal penalties and $2.71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3.83. In the cross section, the reputation loss is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books. [ABSTRACT FROM AUTHOR]

SUMMARY: Using a sample of public firm FCPA violations, we investigate how auditors respond to FCPA risk. We find that audit fees are higher for FCPA violators beginning in the violation period with an additional increase during the period in which regulatory investigations occur. Fees exhibit a greater sensitivity to payables and SG&A expenses for FCPA violators than for non-violators, suggesting that auditors adapt their procedures for accounts that have the highest likely FCPA risk. We also find evidence of a contagion effect with respect to FCPA risk and audit fees among non-violating peers of FCPA violators. Finally, we show that many of the relationships we document for FCPA violators exist among non-violating firms with elevated foreign bribery risk as well, but in magnitudes that are smaller than those of confirmed FCPA violators. [ABSTRACT FROM AUTHOR]

Regulators claim to reward firm cooperation in the enforcement process. However, critics question which actions constitute firm cooperation and contend that cooperation leads to "harsh" and "unfair" outcomes. Examining 1,162 enforcement actions for financial misrepresentation initiated by the Securities and Exchange Commission and Department of Justice, we find that regulator-cited cooperation credit is best explained by remedial actions and self-reported law violations. Cooperation credit is negatively associated with firm monetary penalties assessed by regulators. Our estimates suggest that firms with cooperation credit realize an average penalty reduction of $23.8 million (49 percent). We also estimate that average reputation-related losses are $756 million (70 percent) lower for firms with cooperation credit. We find no association between cooperation credit and related private action outcomes. Our results provide important insight into what constitutes meaningful cooperation with regulators, and suggest that the benefits can be substantial for firms deemed to be cooperative. JEL Classifications: G38; K22; K42; M41. [ABSTRACT FROM AUTHOR]

The article focuses on the way prosecutors speak in the area of corporate crime in the U.S. Topics discussed include an account of prudential deferred prosecution agreement, and non-prosecution agreement; Department of Justice's corporate prosecution program; and prosecutors speech on corporate crime.

An extensive literature examines the causes and effects of financial misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Accounting and Auditing Enforcement Releases (AAERs). We show that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which regulators brought enforcement actions for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four features of each database that affect inferences from empirical tests. We show the extent to which each database is subject to these concerns and offer suggestions for researchers using these databases. [ABSTRACT FROM AUTHOR]

The article examines the annual enforcement report from the Securities and Exchange Commission (SEC) in the U.S. Particular focus is given to the legal foundations of agency reporting. Additional topics discussed include problems with SEC reporting, the reliability of this reporting and the EPA (Environmental Protection Agency) and its reports on air quality.

Institutional investors, exchanges, and government regulators have pushed for increased board independence. The push has continued despite, at best, inconclusive evidence that independent boards improve corporate performance or reduce corporate malfeasance. This Article suggests that institutional investors value director independence because it displaces more meaningful reform. Regulatory reform is inevitable after corporate scandals and crises. But, the content of that regulation is not inevitable. Institutional investors and managers have successfully convinced lawmakers to rely on corporate governance reforms in lieu of more stringent substantive regulation. Reforms involving independent boards have been popular with Congress and regulators because independence has connotations of objectivity, expertise, and fairness, because independence is familiar, and because Congress wants to minimize the cost of regulation and independence is inexpensive. Independence may be inexpensive, but it is also ineffective. Managerial disloyalty to investors is only one type of misconduct. Since boards put the interests of investors first, the board may not stop misconduct that siphons resources from other groups to investors, from price fixing and bribes to excessive risk taking and fraud. Future corporate and financial reform should not aim to protect investors from management. Rather, it needs to control externalities that investors themselves impose on others. Board independence mandates should be retired because they are inefficient at best and damaging at worst. [ABSTRACT FROM AUTHOR]

A textualist interpretation of the implied private right of action under section 10(b) of the Exchange Act concludes that the right to recover money damages in an aftermarket fraud can be no broader than the express right of recovery under section 18(a) of the Exchange Act. The Act's original legislative history and recent Supreme Court doctrine are consistent with this conclusion, as is the Act's subsequent legislative history. Section 18(a), however, requires that plaintiffs affirmatively demonstrate actual "eyeball or eardrum" reliance as a precondition to recovery and does not permit a rebuttable presumption of reliance. Accordingly, if the Exchange Act is to be interpreted as a "harmonious whole," with the scope of recovery under the implied section 10(b) private right being no greater than the recovery available under the most analogous express remedy, section 18(a), then section 10 (b) plaintiffs must either demonstrate actual reliance as a precondition to recovery of damages, or the U.S. Supreme Court should revisit Basic, as suggested by four Justices in Amgen, and overturn Basic's rebuttable presumption of reliance. A textualist approach thus provides a rationale for either distinguishing or reversing Basic that avoids the complex debate over the validity of the efficient market hypothesis, an academic dispute that the Court is not optimally situated to referee. Experience also demonstrates that Basic's presumption of reliance, which is nominally rebuttable, is effectively irrebuttable once it attaches. In the context of class action litigation, because a de facto irrebutable presumption of reliance effectively eliminates the reliance requirement, and because every Justice that has ever addressed the question, whether in majority, concurrence, or dissent, agrees that reliance is an element of the section 10(b) private right of action, the continued application of the de facto irrebutable presumption of reliance creates an irreconcilable conflict between the law as applied in fact and the law as described by the Supreme Court's doctrine. This observation provides a further basis upon which to challenge Basic's continuing vitality. The implications of this analysis are potentially profound. If plaintiffs must affirmatively demonstrate actual reliance, then many section 10(b) securities fraud class actions become uncertifiable because individual questions will predominate. Private securities fraud litigation would then likely be dominated by class actions asserting violations of section 11 of the Securities Act as well as by a scrum of individual actions brought by larger investors with significant damage claims in major cases. The battle would then likely move to Congress, which could legislate a rebuttable presumption of reliance, or otherwise amend the statute to reform the securities litigation process. [ABSTRACT FROM AUTHOR]

With expanding U.S. business operations around the globe, the potential for significant exposure to international corruption increases along with the increased risks associated with anti-bribery laws. Companies who employ citizens of the United Kingdom, maintain an office in the United Kingdom, or are service providers to any United Kingdom organizations, are subject to the U.K. Bribery Act and may be held liable for unlimited fines and jail terms that increase to ten years. Regardless of their countries of origin, multinational companies will inevitability be impacted by the U.K. and U.S. anti-bribery statutes. The United States' Securities and Exchange Commission (SEC) and the United Kingdom's Serious Frauds Office (SFO), Financial Conduct Authority (FCA), and Prudential Regulation Authority (PRA) are increasing their coordination to work together in the areas of common regulatory interest, including cross-border enforcement cases. Any attempt to assess corporate risk for a U.K. Bribery Act violation requires an understanding of how the statute operates and is enforced. At its core, the U.K. Bribery Act creates four distinct "categories of offenses: (1) bribing another person; (2) taking bribes; (3) bribing foreign public officials; and (4) the failure of a commercial organization to prevent bribery."[1] We begin with a brief discussion of the international bribery problem. Next, because the U.K. Bribery Act is relatively new, we provide an explanation and analysis of the act, along with a description of the SFO's revised policies published on October 9, 2012. An analysis of many of the key differences between the Foreign Corrupt Practices Act (FCPA) and U.K. Bribery Act is then presented. Now that more than two years have passed since implementation, an assessment of this law's impact is presented. As the world continues to grow smaller and commerce increases, corporate officers and directors must necessarily become familiar with the provisions of the U.K. Bribery Act. [ABSTRACT FROM AUTHOR]

Over the course of the thirty-five-year lifespan of the Foreign Corrupt Practices Act (FCPA ) there have been surprisingly few attempts to analyze the impact of the statute on company decision-making. Empirical studies have instead focused on macroeconomic indicators of foreign direct investment concluding that the statute deters investment in countries per-ceived to be corrupt. However, firm-level analysis of companies who have been subject to enforcement actions under the FCPA with either the United States Department of fustice (DoJ) or the Securities and Exchange Commis-sion (SEC) paints a different picture. An examination of firm-level decision-making through a case study and broader statistical quantification suggests that these companies do not, on balance, divest from these countries. Theo-ries which reconcile these potentially contrasting observations of the FCPA's impact in emerging markets suggest changes to the statute's enforcement pol-icy which should be considered seriously by regulators. This Note serves as an initial attempt to offer a more nuanced view of the impact of FCPA enforcement on company decision-making and provide suggestions for fur-ther research and reform. [ABSTRACT FROM AUTHOR]

Most enforcement actions brought against firms under the U.S. Foreign Corrupt Practices Act (FCPA) are resolved via a deferred prosecution agreement (DPA) or non-prosecution agreement (NPA). But before federal regulators will consider negotiating over these types of settlement vehicles, they typically, weigh a firm's willingness to cooperate with the underlying investigation and whether it promoted a "culture of compliance." As this paper shows, these two factors do not always intersect in ways that serve the best interests of firms at risk for FCPA scrutiny. Cooperation often means asking company counsel to identify individual agents responsible for the. alleged. wrongdoing. If these agents are then disciplined or prosecuted in separate actions, the resulting dynamic can lead to distrust between agents and counsel, a breakdown in internal communications, feelings of unfair treatment, and inappropriate levels of risk aversion-all of which are undesirable from a firm's perspective and can hinder efforts to maintain a law-abiding culture. These issues are not all new, but they take on particular significance in the FCPA context due to the often expansive way regulators interpret the FCPA, the complexities associated with the transnational nature of the underlying conduct, and the frequently blurry lines between permissible competitive activity and impermissible bribery. Though many firms may ultimately decide that the potentially negative effects of cooperation are worth the upside of settlement, it is essential that they and their counsel remain cognizant of these issues when designing internal compliance programs. Regulators, too, need to be aware of how their enforcement policies could hinder efforts at corporate self-policing. [ABSTRACT FROM AUTHOR]

To identify the most effective mechanisms for detecting corporate fraud, we study all reported fraud cases in large U.S. companies between 1996 and 2004. We find that fraud detection does not rely on standard corporate governance actors (investors, SEC, and auditors), but rather takes a village, including several nontraditional players (employees, media, and industry regulators). Differences in access to information, as well as monetary and reputational incentives, help to explain this pattern. In-depth analyses suggest that reputational incentives in general are weak, except for journalists in large cases. By contrast, monetary incentives help explain employee whistleblowing. [ABSTRACT FROM AUTHOR]

We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time-to-discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values. [ABSTRACT FROM AUTHOR]