“Doing Well” despite “Doing Bad”? Investor Response to Repeated Illegal Behavior

Abstract

This study examines how a firm’s history of repeated offending affects investor response to a new illegal act. Drawing on expectancy violations theory (EVT), we hypothesize that investor response to the announcement of a new illegal act is more negative for firms with a medium number of prior illegal acts than for firms with a small or a large number of prior illegal acts. Analyzing firms’ illegal acts in the U.S. utilities industry over a 28-year time horizon, we find evidence that a firm’s extent of repeated offending indeed influences investor response to a newly announced illegal act in a U-shaped manner. We further find that prior firm acquittals and industry pervasiveness of corporate illegality dampen the U-shaped relationship. Collectively, our study contributes to extant literatures on corporate illegality and organizational reputation by investigating the performance implications of repeated offending, by unraveling the theoretical mechanisms underlying investor response to repeated offending, and by providing novel evidence that not only good but also bad reputation can function as a buffer in case of a negative event.