Skip to main content

Advertisement

SpringerLink
Log in

Effects of Illegal Behavior on the Financial Performance of US Banking Institutions

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This study investigates whether financial performance is affected by corporate violations of laws and regulations. In a sample of 128 publicly traded banks that were subject to enforcement actions by US regulatory authorities over a 20-year period, we observed a significant negative market reaction pursuant to the violations. However, the market reaction did not vary meaningfully in accordance with the severity or repetitiveness of the violation. The results of this study are in conformity with previous research on industries other than banking, notably with regard to negative market reaction. This confirms that shareholders in the banking industry react in a manner considerably similar to their counterparts in other industries.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

References

  • Arena, M. (2008). Bank failures and bank fundamentals: A comparative analysis of Latin America and East Asia during the nineties using bank-level data. Journal of Banking & Finance, 32(2), 299–310.

    Article  Google Scholar 

  • Arnold, M., & Engelen, P. J. (2007). Do financial markets discipline firms for illegal corporate behaviour? Management & Marketing, 2(4), 103–110.

    Google Scholar 

  • Association of Certified Fraud Examiners. (2002). Fraud statistics web page, http://www.acfe.com.

  • Barney, J. B. (1986). Organization culture: Can it be a source of sustained competitive advantage? Academy of Management Review, 11, 656–665.

    Google Scholar 

  • Baucus, M. S., & Baucus, D. A. (1997). Paying the piper: An empirical examination of longer-term financial consequences of illegal corporate behavior. Academy of Management Journal, 40(1), 129–151.

    Article  Google Scholar 

  • Bhagat, S., Bizjak, J., & Coles, J. (1998). The shareholder wealth implications of corporate lawsuits. Financial Management, 7, 5–27.

    Article  Google Scholar 

  • Brien, A. (1996). Regulating virtue: Formulating, engendering and enforcing corporate ethical codes. Business and Professional Ethics Journal, 15, 21–52.

    Article  Google Scholar 

  • Coff, R. W. (1997). Human assets and management dilemmas: Coping with hazards on the road to resource-based theory. Academy of Management Review, 22, 374–402.

    Google Scholar 

  • Decker, O. S. (2004). Corporate social responsibility and structural change in financial services. Managerial Auditing Journal, 19(6), 712–728.

    Article  Google Scholar 

  • Donker, H., Poff, D., & Zahir, S. (2008). Corporate values, codes of ethics, and firm performance: A look at the Canadian context. Journal of Business Ethics, 82, 527–537.

    Article  Google Scholar 

  • Drake, B., & E. Drake. (1988). Ethical and legal aspects of managing corporate cultures. California Management Review, 30(2), 107–123.

    Google Scholar 

  • Federal Reserve. (2011). http://www.federalreserve.gov.

  • Francis, R. (2001). Evidence for the value of ethics. Journal of Financial Crime, 9, 26–29.

    Article  Google Scholar 

  • Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitman.

    Google Scholar 

  • Friedman, M. (1970). The social responsibility of business is to increase its profits. The New York Times Magazine, 13, 32–33.

    Google Scholar 

  • Frooman, J. (1997). Socially irresponsible and illegal behavior and shareholder wealth: A meta-analysis of event studies. Business and Society, 36, 221–249.

    Article  Google Scholar 

  • Gilbert, A. R., & Vaughan, M. (2001). Do depositors care about enforcement actions? Journal of Economics and Business, 53(2/3), 283–311.

    Article  Google Scholar 

  • Godfrey, P. C., Merill, C. B., & Hansen, J. M. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30, 425–445.

    Article  Google Scholar 

  • Griffin, J. J., & Mahon, J. F. (1997). The corporate social performance and corporate financial performance debate: Twenty-five years of incomparable research. Business and Society, 36, 5–31.

    Article  Google Scholar 

  • Gully-Hart, P. (2005). The risk of being sued by those damaged by regulatory of enforcement action: Over-regulation of financial services. Journal of Financial Crime, 12(3), 246–250.

    Article  Google Scholar 

  • Gunthorpe, D. L. (1997). Business ethics: A quantitative analysis of the impact of unethical behaviour by publicly traded corporations. Journal of Business Ethics, 16(5), 537–543.

    Article  Google Scholar 

  • Hansen, L. (2009). Corporate financial crime: Social diagnosis and treatment. Journal of Financial Crime, 16(1), 28–40.

    Article  Google Scholar 

  • Hill, C., Kelley, P., Agle, B., Hitt, M., & Hoskisson, R. (1992). An empirical examination of the causes of corporate wrongdoing in the United States. Human Relations, 45, 1055–1076.

    Article  Google Scholar 

  • Hogsett, R. M., & Radig, W. J. (1994). Employee crime: The cost and some control measures. Review of Business, 16(2), 9–14.

    Google Scholar 

  • Hunt, S. D., Wood, V. R., & Chonko, L. B. (1989). Corporate ethical values and organizational commitment. Journal of Marketing, 53(3), 79–90.

    Article  Google Scholar 

  • Jackson, W. D., M. Jickling, G. Shorter, M. Murphy, & M. Seitzinger. (2006). Banking and securities regulation and agency enforcement authorities. CRS report for Congress.

  • Jansen, E., & Von Glinow, M. A. (1985). Ethical ambivalence and organizational reward systems. Academy of Management Review, 10, 814–822.

    Google Scholar 

  • Jordan, J. S., Peek, J., & Rosengren, E. S. (1999). The impact of greater bank disclosure amidst a banking crisis. Federal Reserve Bank of Boston Working Paper, No. 99-1.

  • Kaptein, M. (2004). Business codes of multinational firms: What do they say? Journal of Business Ethics, 50, 13–31.

    Article  Google Scholar 

  • Karpoff, J., & Lott, J. (1993). The reputational penalty firms bear from committing criminal fraud. Journal of Law and Economics, 36, 757–802.

    Article  Google Scholar 

  • Langus, G., & M. Motta. (2010). The effect of EU antitrust investigations and fines on the firm’s valuation. EUI Working Paper.

  • Mahoney, J. T., & Pandian, J. R. (1992). The resource based view within the conversation of strategic management. Strategic Management Journal, 13(5), 363–380.

    Article  Google Scholar 

  • Makni, R., Francoeur, C., & Bellavance, F. (2008). Causality between corporate social performance and financial performance: Evidence from Canadian firms. Journal of Business Ethics, 89, 409–422.

    Article  Google Scholar 

  • McKendall, M., DeMarr, B., & Jones-Rikkers, C. (2002). Ethical compliance programs and corporate illegality: Testing the assumptions of the corporate sentencing guidelines. Journal of Business Ethics, 37, 367–383.

    Article  Google Scholar 

  • Miles, R. A. (1987). Managing the corporate social environment: A grounded theory. Englewood Cliffs, NJ: Prentice Hall.

    Google Scholar 

  • Molander, E. (1987). A paradigm for design, promulgation and enforcement of ethical codes. Journal of Business Ethics, 6, 619–631.

    Article  Google Scholar 

  • Murphy, D. L., Shrieves, R. E., & S. L. Tibbs. (2009). Understanding the penalties associated with corporate misconduct: An empirical examination of earnings and risk. Journal of Financial and Quantitative Analysis, 44(1), 55–83.

    Google Scholar 

  • Office of the Comptroller of the Currency. (2011). http://www.occ.gov.

  • Onder, Z., & Ozildirim, S. (2008). Market reaction to risky banks: Did generous deposit guarantee change it? World Development, 36(8), 1415–1435.

    Article  Google Scholar 

  • Orlitzky, M., & Benjamin, J. D. (2001). Corporate social performance and firm risk: A metaanalytic review. Business & Society, 40, 369–396.

    Article  Google Scholar 

  • Peloza, J. (2006). Using corporate social responsibility as insurance for financial performance. California Management Review, 48(2), 52–72.

    Article  Google Scholar 

  • Rao, S. M., & Hamilton, J. B. (1996). The effect of published reports of unethical conduct on stock prices. Journal of Business Ethics, 15, 1321–1330.

    Article  Google Scholar 

  • Reichert, A. K., Lockett, M., & Rao, R. P. (1996). The impact of illegal business practice on shareholder returns. The Financial Review, 31, 67–85.

    Article  Google Scholar 

  • Robin, D. (2009). Toward an applied meaning for ethics in business. Journal of Business Ethics, 89, 139–150.

    Article  Google Scholar 

  • Rowley, T., & Berman, S. (2000). A brand new brand of corporate social performance. Business & Society, 39(4), 397–412.

    Article  Google Scholar 

  • Ruf, B. M., Muralidhar, K., Brown, R. M., Janney, J. J., & Paul, K. (2001). An empirical investigation of the relationship between change in corporate social performance and financial performance: A stakeholder theory perspective. Journal of Business Ethics, 32(2), 143–156.

    Article  Google Scholar 

  • Schnatterly, K. (2003). Increasing firm value through detection and prevention of white-collar-crime. Strategic Management Journal, 24, 587–614.

    Article  Google Scholar 

  • Securities and Exchange Commission. (2011). http://www.sec.gov.

  • Simpson, W. G., & Kohers, T. (2002). The link between corporate social and financial performance: Evidence from the banking industry. Journal of Business Ethics, 35(2), 97–109.

    Article  Google Scholar 

  • Touby, L. (1994). In the company of thieves. Journal of Business Strategy, 15(3), 24–35.

    Article  Google Scholar 

  • Waddock, S. A., Bodwell, C., & Graves, S. B. (2002). Responsibility: The new business imperative. The Academy of Management Executive, 16(2), 132–147.

    Article  Google Scholar 

  • Waddock, S. A., & Graves, S. M. (1997). The corporate social performance-financial performance link. Strategic Management Journal, 18(4), 303–319.

    Article  Google Scholar 

  • Waters, J., & Bird, F. (1987). The moral dimension of organizational culture. Journal of Business Ethics, 6, 15–22.

    Article  Google Scholar 

  • Weller, S. (1988). The effectiveness of corporate codes of ethics. Journal of Business Ethics, 7, 389–396.

    Article  Google Scholar 

  • Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180.

    Article  Google Scholar 

  • Zahra, S. A., Priem, R. L., & Rasheed, A. A. (2005). The antecedents and consequences of top management fraud. Journal of Management, 31, 803–828.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Olayan School of Business, American University of Beirut, P.O. Box: 11-0236, Riad El-Solh, Beirut, 1107-2020, Lebanon

    Mohamad Jamal Zeidan

Authors
  1. Mohamad Jamal Zeidan
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Mohamad Jamal Zeidan.

Appendix

Appendix

See Tables 6, 7, and 8.

Table 6 Average abnormal returns (AR)
Full size table
Table 7 Cumulative average abnormal returns for single offenders (N = 104 institutions)
Full size table
Table 8 Regression analysis of CAR [−1,1] for single offenders (N = 104 institutions)
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Zeidan, M.J. Effects of Illegal Behavior on the Financial Performance of US Banking Institutions. J Bus Ethics 112, 313–324 (2013). https://doi.org/10.1007/s10551-012-1253-2

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-012-1253-2

Keywords

Search

Navigation