The Effect of Corporate Prosecutions on Corporate Financial Policy in U.S. Firms

I investigate the impact of corporate prosecutions on firm risk and corporate financial policy. Using a unique dataset from Corporate Prosecution Registry compiled by Duke University School of Law and Legal Data Lab at the University Virginia, I find that the prosecuted U.S. firms exhibit negative buy-and-hold stock returns and high turnover ratios in the stock market, using univariate tests. Moreover, I implement a difference-in-differences model, and find that the risk associated with the prosecuted firms in the stock market significantly increases after the prosecutions. Consequently, those firms are likely to hold more cash following the prosecutions, and even decrease their capital investments and mergers and acquisitions when they are imposed heavy regulatory fines.