Do financial analysts care about FCPA violations

Abstract

In this paper, we examine 12,954 equity research reports for 24 firms that are subject to enforcement actions by the US Securities and Exchange Commission (SEC) for violations of the Foreign Corrupt Practices Act (FCPA). We search the text of the equity research reports for a number of FCPA-related keywords and identify 1079 reports, where an analyst considers the SEC investigation an important issue. Our multivariate empirical analysis shows that financial analysts are more likely to be interested in incidents of FCPA violations, if the fines imposed to the firms by the SEC, DOJ (Department of Justice), and other US agencies represent substantial components of their revenues, operating income, and market capitalisation. We also find that the interest of financial analysts in these cases increases when the subject firms are relatively small with poor profitability. We offer illustrative examples of how financial analysts actually refer to the FCPA violations in their equity research reports. We believe that this study contributes to the relevant literature by highlighting the importance and implications of the FCPA statute for capital market participants.