Does a legal penalty announcement matter? An event study of various market reactions to legal penalty announcements

Abstract

This paper investigates whether the penalty announcements have any impact on the stock return of listed firms in some specific countries. The study is focused on observing if the abnormal return (AR) is negative on the event day, by conducting an event study approach suggested by MacKinlay (1997). By using the market model statistical method, our study finds that the cumulative abnormal return (CAR) is -0.7% when the event window is [-1,2]; one day before the announcement and two days after the announcement. For this event window, the returns are significant at a 95% level. We also discovered (in section 7.1, figure 3), that the average abnormal return for all companies decreases from 0.10 to -0.25 on the very next day after the penalty announcements. The study also finds that, when the penalty size relative to the market capitalization is larger, CAR changes significantly for most of the firms in our study. Unexpectedly, we find no substantial impact on abnormal returns while studying for different countries. From the cross-sectional analysis, we observe that the cumulative abnormal returns decline when the relative penalty size increases. The coefficient of -0.639 for Relative Penalty Size indicates that there is, indeed, a negative relationship between relative penalty size and the abnormal return. The intuition makes sense as the larger size of the penalty relative to the market capital points to a decrement in abnormal returns. Besides, no other event-specific variables are found significant in demonstrating cumulative abnormal return on various event windows in the cross-sectional analysis. To round off, we tested the robustness of our regression analysis and found no violation of OLS assumptions in our analysis.