The Impact of Anti-Bribery Enforcement Actions on Target Firms Jonathan M. Karpoff WAMU Chair in...
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Transcript of The Impact of Anti-Bribery Enforcement Actions on Target Firms Jonathan M. Karpoff WAMU Chair in...
The Impact of Anti-Bribery Enforcement Actions
on Target Firms
Jonathan M. KarpoffWAMU Chair in Innovation
Foster School of Business
University of Washington
D. Scott LeeLincy Professor of Finance
Lee School of Business
Univ. of Nevada, Las Vegas
Gerald S. MartinAssoc. Professor of Finance
Kogod School of Business
American University
Anti-bribery efforts worldwideFrom Trace International’s Global Enforcement Report 2011
Impacts of anti-bribery enforcement 3
Impacts of anti-bribery enforcement 4
U.S. anti-bribery enforcement actions on the rise(1978 through June 2011)
Total = 109(excludes 44 actions not involving publicly traded firms)
“Even a single incident [of an FCPA bribery charge] can lead to irreparable economic hardship and reputational damage that may adversely affect the overall stability and competitiveness of any business.”
– Pricewaterhouse Coopers
“…the puny size of the penalties [for bribery] could provide an incentive for managers to stretch the rules.”
– Fortune magazine
5Impacts of anti-bribery enforcement
What happens to these firms?
Impacts of anti-bribery enforcement 6
Our questions
How costly is it to be targeted for bribery enforcement?
What is the nature of the cost? Fines and penalties?
Investigation expenses?
Foregone bribery-dependent revenues?
A general loss in reputation?
For firms, an optimization issue: How much should a firm spend on anti-bribery
compliance and control?
For regulators, an enforcement puzzle: Are reputational costs small or large? If reputational loss is small, then deterrence
depends on legal and regulatory actions.
7Impacts of anti-bribery enforcement
Why is this important?
What do I mean by REPUTATION?
Reputational capital is the present value of favorable business terms received from those who trust you to not act opportunistically to their detriment. customers suppliers employees investors
Impacts of anti-bribery enforcement 9
Reputational capital is:
An asset, just like the firm’s physical plant and people. Created by investment, just like a building is created by
investment. Affected by random events, good and bad luck, and
things outside the firm’s control (like a building’s value).
A damaged reputation can be repaired by investment. Sometimes it warrants the investment (Tylenol) Sometimes it does not (Arthur Andersen)
Impacts of anti-bribery enforcement 10
Impacts of anti-bribery enforcement 14
United States v. Faro Technologies Inc. (2008)
Sells computerized measurement devices and software
In 2005, Faro’s subsidiary paid $533,163 to managers of China state-controlled firms to obtain sales contracts worth $4.9 million.
In June 2008, Faro agreed with DOJ and SEC to:
$1.1 million criminal penalty
$1.4 million disgorgement
Prejudgment interest of $439,637
Retain an independent compliance monitor
Who gets charged?
16Impacts of anti-bribery enforcement
Large manufacturing firms
Why do firms pay bribes?
17Impacts of anti-bribery enforcement
How large are the bribes?What are the expected benefits to bribe payers?
18Impacts of anti-bribery enforcement
Fuzzy concept, frequently not the NPV
Where are the bribes paid?
Impacts of anti-bribery enforcement 19
Nigeria (n=30)
Iraq (n=26)
China (n=24)
Market value losses
20Impacts of anti-bribery enforcement
What accounts for these losses?
1. Confounding news/associated charges
2. Fines and penalties
3. Investigation costs
4. Lost bribe-related business
5. Reputational losses
1. Effect of simultaneous fraud charges
The largest hits involve financial fraud
21Impacts of anti-bribery enforcement
2. Fines & penalties imposed in bribery enforcements
Impacts of anti-bribery enforcement 22
3. Investigation and legal expenses
Impacts of anti-bribery enforcement 23
5. Is there much of a reputation loss?
Impacts of anti-bribery enforcement 24
Summary
1. Bribery charges are associated with a relatively small but significant loss in market value
2. Why? 1. Confounding news/associated charges - Yes
2. Fines and penalties - Yes
3. Investigation costs – Yes
4. Foregone bribe-related business - Yes
5. Reputational losses – No
Impacts of anti-bribery enforcement 26
Direct costs matter, and more than explain the market value losses
Indirect costs do not matter, on avg.