This study empirically examines how reported corporate misconducts affect the stock
returns of US firms. As the reported misconducts are broadcasted in the newspaper
outlets, the cumulative abnormal return (CAR) is -4.1%. Involvement in a reported
corporate misconduct gets punished by market participants especially when the act
of reported misconduct is blamed on the level of the corporation rather than in involvement
of a specific individual, when reported misconducts take place in the home market,
and when the linguistic tone used in the newspaper article is negative. Financial
penalties imposed, firm size, leverage, revenue growth, and the level of firm foreign
exposure are found to have significant impact on the returns during the period of
observation. The results suggest that investors recognize the importance to penalize
firms in the financial markets when firms act unethically.
