The Long‐Term Performance and Failure Risk of Firms Cited in the US SEC's Accounting and Auditing Enforcement Releases

Abstract

We investigate 239 firms cited in the SEC's Accounting and Auditing Enforcement Releases (AAERs). We document significantly negative abnormal operating performance (measured using both cash-flow-based and earnings-based metrics) in the second and third years following AAERs. We also detect significantly negative abnormal stock returns in up to three years following AAERs. We further find that AAER firms are more likely to fail in the post-AAER period. Taken together, our findings suggest that the negative implications of an AAER citation resulting from egregious financial reporting violations can be long lasting and influence various facets of firm performance and survivability.

Troublesome Tidings? Investors’ Response to a Wells Notice

“…Karpoff, Lee, and Martin (2008a) find that the initial disclosure of an SEC or Department of Justice litigation or administrative action generates an excess return of -9.6 percent. Financial fraud also has long-lasting valuation effects: for example, Leng, Feroz, Cao, and Davalos (2011) document significantly negative abnormal returns for up to three years following AAERs, specifically, mean one-year, two-year, and three-year buy and hold excess returns after the AAER month of -13 percent, -24 percent and -25 percent, respectively. Additionally, some studies examine the market consequences of restatement announcements: for example, Palmrose, Richardson, and Scholz (2004) report a mean excess return of -9.2 percent over two days around the announcement.…”

Enforcement Releases, Firm Characteristics, and Earnings Quality: Insights from Germany's Two‐tiered Enforcement System

“…On the other hand, Leng et al (2011) document the long-term performance of AAER firms subsequent to an enforcement release. They report significant negative operating performance (profitability, liquidity, and leverage) of the AAERs as well as an underperformance in market-based measures and stock performance in the 3 years post the enforcement release.…”

“…Based on the findings of Ettredge et al (2010) and Leng et al (2011), I formulate the following hypotheses which state that H1.1 to H1.4 permanently hold over a certain period of time before and after the announcement of errors, that is, an FREP-enforcement release.…”

Effect on the Price of Companies’ Shares Punished for Corruption Under the Fcpa

“…Utilizando a metodologia F-score para comparar um grupo de empresas de óleo e gás americanas com outro grupo de empresas de óleo e gás não americanas, os resultados mostraram que empresas americanas apresentaram F-scores maiores do que as empresas não americanas em 12 dos 15 anos analisados, levando a conclusão de que a lei FCPA não é efetiva, pois criou uma desvantagem competitiva para as companhias americanas (custos para se manter em conformidade com a lei) vis-à-vis aquelas não sujeitas a tal regulação. Leng et al (2011) investigaram 239 empresas citadas nos Relatórios de Restrição (punição) contábeis e de auditoria (Accounting and Auditing Enforcement Releases -AAER) da SEC e concluíram que estas tiveram resultados anormais negativos no preço das ações como resultado dessas punições, considerando o segundo e terceiro ano após o registro da infração. Foram utilizados como indicadores de retorno, o fluxo de caixa baseado no retorno dos ativos (cash-flow-based return on assets -CFROA) e o resultado baseado no retorno dos ativos (earnings-based return on assets -ROA).…”

“…Estudos anteriores (NOURAYI, 1994;DECHOW;SLOAN;SWEENEY, 1996;SKOUSEN;WRIGHT, 2009;LENG et al, 2011;SILVERS, 2016) já verificaram empiricamente alguns dos aspectos relevantes relacionados ao FCPA e os efeitos sobre o valor das empresas. Este estudo diferencia-se dos demais em função do recorte realizado, o qual tem como foco o efeito da divulgação da punição aplicada pela SEC/DOJ no preço das ações.…”