The Effect of Sanctions on Continuous Disclosure Under the Responsive Enforcement Strategy: Evidence from Australia

Abstract

We examine the deterrent effect of the Australian Securities and Investments Commission (ASIC)’s enforcement of continuous disclosure regulation during the period 2000–2016. Adopting a responsive regulatory approach to enforcement, ASIC has utilized its power to impose criminal, civil, and administrative sanctions on firms that have breached their continuous disclosure obligations. Focusing on these contravention cases and the type of sanctions being applied, we examine changes in market liquidity of peer firms after ASIC has taken enforcement action against a target firm in the same industry. We find that market liquidity for peer firms significantly improved relative to non-peers after ASIC imposed civil and administrative sanctions against a target firm, whereas there was no significant difference in market liquidity when criminal sanctions were levied. The increase in liquidity for peer firms persisted for up to three years. The magnitude of the deterrent effects of administrative sanctions on peer firms was substantially larger than those of criminal or civil sanctions. Contradictory to the criticisms that light sanctions are opaque, untimely, too light, and even “lazy”, our results suggest that light sanctions can successfully securing compliance form industry peers under a responsive enforcement strategy.