Regulatory Enforcement Actions Research Articles

Corporate misconduct and innovation: Evidence from the pharmaceutical industry

We examine the relationship between corporate misconduct and pharmaceutical firm innovation and performance. Pharmaceutical firms obtain significantly fewer new product approvals by the U.S. Food and Drug Administration (FDA) following corporate regulatory violations, lawsuits, and Securities and Exchange Commission (SEC) regulatory enforcement actions. We also examine the potential reasons why innovative capacity is reduced for culpable firms. Following instances of misconduct, pharmaceutical firms are 50 percent less likely to engage in business expansions, engage in significantly fewer new strategic alliances and partnerships, and are awarded fewer government R&D grants. We attribute these results to the reputational loss associated with public knowledge of corporate misconduct. In support of this hypothesis, we find pharmaceutical firms experience negative cumulative abnormal stock returns (CARs) surrounding SEC enforcement announcements, and misconduct incidents increase the probability of analyst concerns. Overall, our results are consistent with the reputational loss associated with corporate misconduct being an important factor in future reductions in pharmaceutical firm innovative capacity.

Regulatory Frameworks for Decentralized Finance (DeFi): Challenges and opportunities

Decentralized Finance (DeFi) has emerged as a disruptive force in the financial industry, offering innovative solutions such as smart contracts, decentralized exchanges, and lending protocols. However, the regulatory landscape for DeFi remains uncertain and fragmented, posing challenges and opportunities for its development and adoption. This abstract provides an overview of the regulatory frameworks for DeFi, highlighting key challenges and opportunities. The regulatory landscape for DeFi is complex and varies significantly across jurisdictions. While some countries have embraced DeFi and blockchain technology, others have adopted a cautious approach, citing concerns such as money laundering, consumer protection, and financial stability. The lack of a harmonized regulatory framework has created uncertainty for DeFi projects and users, hindering mainstream adoption. One of the key challenges facing DeFi is the lack of clarity regarding regulatory compliance. DeFi projects often operate in a decentralized and borderless manner, making it difficult to determine which regulations apply. This ambiguity has led to regulatory scrutiny and enforcement actions in some cases, highlighting the need for clear and comprehensive regulatory guidelines. Despite these challenges, there are also significant opportunities for DeFi to thrive within a regulated framework. Regulatory clarity can provide legitimacy and credibility to the DeFi industry, attracting institutional investors and mainstream users. Moreover, regulations can help protect consumers and ensure the integrity of DeFi protocols, fostering trust and confidence in the ecosystem. To address the challenges and leverage the opportunities, stakeholders in the DeFi ecosystem, including regulators, policymakers, developers, and users, must collaborate to develop a balanced regulatory framework. This framework should prioritize innovation while addressing concerns related to security, privacy, and financial stability. By working together, the DeFi industry can navigate the regulatory landscape and unlock the full potential of decentralized finance for global financial inclusion and economic empowerment.

Illegal shooting of protected nongame birds along power lines coincides with places and times of peak legal recreational shooting

Abstract Illegal killing of protected nongame birds is pervasive and can be demographically relevant. In 2021 and 2022, we evaluated spatial and temporal patterns in illegal killing of birds along 69.7 km of power lines in the Morley Nelson Snake River Birds of Prey National Conservation Area in Idaho, USA, to provide insight into potential drivers behind the activity and key information to manage this threat across the American west. The illegal shooting of 8 species of raptors and corvids we documented was clumped both temporally and spatially, as opposed to being randomly distributed across the year and landscape. We found 72 illegally shot birds, most killed during spring months (March to May), coincident with peak time periods of legal recreational shooting activity, and in places with high levels of recreational shooting. We also found evidence of targeted killing of raptors in the conservation area in areas not associated with recreational shooting. Given the numbers of nesting pairs of some local raptor species, this shooting is likely demographically relevant for some but not all local populations. Likewise, with the prevalence of recreational shooting across the American west, the inference we draw is broadly relevant beyond our Idaho study area. The insight our work provides can enable owners of power lines, law enforcement agencies, and resource managers to coordinate in outreach, regulatory, and law enforcement action to manage a threat that may have widespread impacts for some avian species.

Are firms getting the message? Record-keeping obligations related to off-channel messaging

Several high-profile enforcement actions and significant fines brought against notable financial institutions for violations of record-keeping requirements relating to electronic communications continue to foster discussions throughout the financial services industry. This paper seeks to provide a timeline of the most notable regulatory activity and enforcement actions taken against firms. Secondarily, this paper will discuss the regulatory requirements for record-keeping and electronic communications as they relate to broker-dealers and registered investment advisers, while also highlighting significant differences between the two sets of requirements. Lastly, this paper provides guidance for financial services firms on implementing an effective compliance framework for establishing record-keeping controls that could potentially aid firms in meeting their regulatory obligations.

Enforcement Waves and Spillovers

We document that regulatory enforcement actions for financial misrepresentation cluster in industry-specific waves and that wave-related enforcement has information spillovers on industry peer firms. Waves and spillovers have significant effects on share prices. Early-wave target firms have the largest short-run losses in share values and the largest information spillovers on industry peer firms. Late-wave targets’ short-run losses are smaller, but not because they involve less costly instances of misconduct. Rather, late-wave targets are subject to more information spillovers from earlier in the wave. These results indicate that prices incorporate changes in the likelihood that a firm will face wave-related enforcement action for financial misconduct. Short-window share-price losses understate the total share-price impact, particularly for firms whose financial misrepresentation is revealed late in an enforcement wave. This paper was accepted by David Simchi-Levi, finance. Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2023.4711 .

Organizational culture, competition and bank loan loss provisioning

This paper investigates how banks with different organizational cultures (defined as either control-dominant, collaborate-dominant, compete-dominant, create-dominant) manage their loan loss provisions (LLPs) in response to intensified industry competition. For identification, we utilize the change in state-level competition that followed the passage of the US Interstate Banking and Branching Efficiency Act (IBBEA) of 1994 as a quasi-natural experiment. We find that banks with a collaborate-dominant organizational culture are less likely to exercise discretion over LLPs. In contrast, banks with compete- and create-dominant organizational cultures are more likely to utilize discretionary LLPs when competition increases. Moreover, banks use discretionary LLPs to smooth income and signal private information to outsiders. Banks with collaborate-dominant organizational cultures exhibit less income smoothing. Counterparts with a create-dominant organizational culture use discretionary LLPs to signal information to outside stakeholders. Finally, banks with a create-dominant organizational culture are more likely to be subject to formal regulatory enforcement actions.

Testing the Principle of Praesumtio Iustae Causa in State Administrative Disputes During Pandemic

In the implementation of the state administrative decree, the principle of praesumtio iustae causa is known as part of the implementation of the state administrative decree to resolve state administrative disputes. This principle means that a state administrative decision is always considered valid. This research has the aim of providing protection for the rights of the people that originate from individual rights as well as providing protection for the rights of the community based on the common interests of individuals in the community. The government has an obligation to promote the general welfare as stated in the constitutional mandate. In carrying out this obligation, the government takes regulatory and administrative law enforcement actions. The research method used is descriptive normative research, judging from the effectiveness of this principle is considered valid. And not only that, the possibility of disputes in the state administrative area occurring in the current pandemic era sees this case being included in the area of state administration, even these disputes are often found in the government. The conclusion is Article 65 of Law Number 30 of 2014 concerning Government Administration, what is protected is the interests of the wider community who will be harmed by the issuance of the government decree. So that with the provisions in Article 65 of Law Number 30 of 2014 concerning Government Administration, it can add options for the community to get wider legal protection for the issuance of a government decree/action.

Law enforcement spillover effects in the financial sector

AbstractRecipient firms but also comparable peer firms exhibit a sizeable negative capital market reaction to United Kingdom's regulatory enforcement actions. This result is invariant to the identification of peer firms as belonging to the same industry classification or as having comparable propensity scores to attract a sanction. Indiscriminate regulatory contagion, however, is ruled out. As per expectation, enforcement actions which pierce the ‘corporate veil’, that is, target an individual within a firm, are related to no significant firm‐level market reactions. These findings, in the financial sector, indicate that sanctions are associated with a material spillover effect consistent with informed regulatory contagion.

КЛИЕНТОЦЕНТРИЧНОСТЬ ГОСУДАРСТВЕННОГО КОНТРОЛЯ: ОЦЕНКА ГРАЖДАН

Implementing client-centered culture is seen as one of the core areas for further improvement of public administration in Russia. Traditionally both international and Russian literature reviews client centricity in the context of public service quality. However, the range of functions which aim at fulfilling public interest and entail interaction with citizens goes far beyond public service delivery. The article aims at filling this gap based on developing and testing a methodic approach to evaluating client centricity of state regulatory enforcement bodies from the citizen perspective. Based on the empirical data collected through representative sociological public surveys conducted by RANEPA in 2018-2022, the authors evaluate client centricity of state regulatory enforcement bodies through the lens of key governance quality parameters: validity, effectiveness, and efficiency. It is demonstrated that while there are some positive trends in improved validity and effectiveness of the state regulatory enforcement actions, there have been no efficiency gains in this area. Further improvement of client centricity in regulatory enforcement area calls for simplifying the procedures for citizens to file complaints to the relevant authorities and for improving the effectiveness in reviewing and responding to such complaints. Special attention is required to improve client centricity for distant forms of interaction between citizens applying to state regulatory enforcement bodies for protection of public values (ranging from health and property to environment and personal data) and public authorities (i.e., by post, electronically or by phone).

Detecting Financial Misreporting with Real Production Activity: Evidence from an Electricity Consumption Analysis*

ABSTRACTThis study examines whether a real production activity measure, firm‐level electricity consumption growth, is useful in detecting firm financial misreporting. Identifying proxies for a firm's underlying financial performance that are not a function of the firm's accounting system is essential for detection of misreporting. We propose that the difference between revenue growth and electricity consumption growth (i.e., growth wedge (GW)) is a useful signal of financial misreporting. Using electricity consumption data for Korean firms from 2006 to 2014, we find that the GW is positively associated with discretionary revenues and accruals and the likelihood of financial misreporting as proxied by accounting restatements, qualified audit opinions, and regulatory enforcement actions. The GW provides incremental information over firm characteristics and earnings management signals examined by prior research. Our findings are robust to a battery of additional tests, including within‐firm and industry comparisons that do not require access to cross‐sectional firm‐level electricity data. Overall, our study documents new evidence on the role of a real production activity measure from an independent reporting entity in detecting financial misreporting. Our evidence speaks to the potential usefulness of real activity metrics in forensic economics.

Agency Conflicts and Dividend Persistence

Bank dividends are unusually persistent. In a crisis, they exacerbate systemic risk and raise concerns for regulators. Bank managers, however, may keep dividends elevated to mitigate agency conflicts with shareholders. One theory holds that persistent dividends may substitute for monitoring by dispersed shareholders. A second theory proposes that they attract institutional shareholders who monitor banks, mitigate agency conflicts, and seek to protect their investments’ value. After controlling for regulatory enforcement actions, we test both theories using 7722 bank-quarter observations spanning the 2007–2009 financial crisis. Our results suggest that dividend persistence increases with managerial agency conflicts but decreases in the presence of concentrated institutional shareholders, consistent with the second theory. In addition, contrary to the first theory, dispersed shareholders have no influence on bank dividend policies. Instead, these dispersed shareholders are associated with more frequent stock repurchase programs.

Analysing several ASEAN countries' policy for combating marine plastic litter

The recent 34th ASEAN Summit, held in Thailand in June 2019, issued two important documents related to the marine environment’s protection, namely The Bangkok Declaration on Combating Marine Debris in the ASEAN Region and the ASEAN Framework of Action on Marine Debris (Framework of Action). Therefore, this research analyses the several policies implemented by ASEAN countries to reduce marine plastic litter. This is primarily assessed using several indicators by Konisky and Woods, namely (1) programmatic indicators of state environmental policy activism, which is usually incorporated into an index reflecting the quality of the national ecological system, (2) the amount of money spent by the state government on environmental protection, (3) the number of private-sector expenditure on environmental pollution reduction, also used as a proxy for the stringency of state environmental regulation and (4) counts of state environmental regulatory enforcement actions. This research showed that ASEAN countries consider that the process used in handling marine plastic litter needs to be resolved collaboratively and comprehensively. Therefore, each country already has programmatic indices and regulatory actions with the majority relatively weak on other indicators, primarily on government expenditures, enforcement programs and pollution abatement costs.

Does political influence distort banking regulation? Evidence from the US

This study examines the interplay between political influence and regulatory decision-making. Political influence is captured based on whether a bank is headquartered in a state where an elected official holds a chair position on a congressional committee related to the banking and financial services industry. Using data of US commercial banks over the period 2000–2015, we show that our measure of political influence reduces a bank's probability of receiving a formal regulatory enforcement action. Results are robust to the use of alternative model specifications and the sample restrictions. However, we find that various bank and environmental characteristics are important conditional factors.

Government Control, Regulatory Enforcement Actions, and the Cost of Equity

Using a comprehensive manually collected dataset of regulatory enforcement actions against fraud in the Chinese capital market and a difference-in-differences (DID) research design, we examine the impact of such actions on the implied cost of equity and the role of the government as the controlling shareholder in moderating this relationship. We find that regulatory enforcement actions increase firms’ cost of equity, and that government controlling shareholders can mitigate the effect of these actions. Our results are robust to various sensitivity tests, including alternative measures of the cost of equity, alternative samples, additional control variables, and an alternative DID design. Additional analysis provides supporting evidence that the effect of enforcement actions on the cost of equity arises from investors’ perception of higher long-run information risk in the case of fraud firms. Further, government controlling shareholders can mitigate the impact of such actions on the cost of equity by lowering investors’ perceived information risk.

Expert Elicitation to Estimate the Relative Risk of Food Safety Criteria Included in the Establishment-Based Risk Assessment Model for Canadian Hatcheries.

The Canadian Food Inspection Agency is developing an Establishment-based Risk Assessment model for Hatcheries to allocate inspection resources according to the food safety risk associated with each hatchery falling under its jurisdiction. In a previous study, 29 factors contributing to the food safety risk of hatcheries were identified and grouped into three clusters (inherent risk, risk mitigation, and compliance) and assessment criteria were defined. The objective of the current study was to estimate the relative risk (RR) of these criteria. Two rounds of expert elicitations were conducted to allow 13 Canadian experts to estimate the RR of each criterion (n = 96) based on its potential impact on human health, with a specific focus on Salmonella spp. This process also aimed to estimate the maximum increase or decrease in the overall food safety risk of a hatchery when considering multiple criteria belonging to a specific cluster and to assess the risk attribution of Salmonella spp. at the hatchery and bird-type levels. Results showed that the respondent profile had no influence on the importance given to a majority of criteria. Uniformity of answers among experts improved from the first to the second round. Overall, 62.5%, 32.3%, and 5.2% of the criteria were attributed to an RR that was less than 2, between 2 and 3, and greater than 3, respectively. Mixing eggs from different supply flocks when placed into the same hatching unit, hatching multiple species, and importing eggs with unknown quality status were identified as having the highest contribution to a hatchery's inherent risk. Requiring information on the foodborne pathogen status of supplying flocks and the occurrence of regulatory enforcement actions were the most impactful risk mitigation and compliance factors, respectively. The median RR value assigned to each criterion and cluster will be used to build this new model.

“It's not what you see but what you hear…": Understanding environment protection officers' responsive decision making

Responsive regulation asserts that regulatory enforcement actions are likely to be more effective in promoting compliance when they respond to a duty holder's motives, capabilities, and external pressures. However, operationalizing responsive approaches that also possess qualities of consistency and transparency remains a challenge for environmental management authorities. This study applied a mixed-method qualitative approach to capture the responsive decision making influences on government environment protection officers in a field context when engaging with different duty holders. These insights then informed compliance narratives across a series of business behavior segments to guide more consistent, transparent and responsive decision making among environment protection officers. Our findings revealed how different constellations of observations, interactions and displays of willingness and ability impact the choice of regulatory responses. Challenges encountered in applying responsive regulation in practice involved difficulties ascertaining business capability, identifying causal links between response strategies and compliance outcomes, and how the use of discretion can impact on consistent and transparent decision making.

The Prevalence and Costs of Financial Misrepresentation

We use a comprehensive database of regulatory enforcement actions for financial misrepresentation and apply Receiver Operating Characteristics theory to construct a misrepresentation prediction model. The model performs well both in and out of sample, with an average area under the curve (AUC) of 0.78 in out-of-sample tests. The model’s base case implies that 22.3% of Compustat-listed firms are engaged in financial misrepresentation that is potentially sanctionable by regulators in an average year. The average violation period is 3.1 years, implying that 7.2% of firms initiate new programs of financial misrepresentation each year. Of these, 3.5% eventually are caught and sanctioned. These findings yield numerical estimates of the size of the price distortions imposed by misrepresentation on the shares of both misrepresenting and non-misrepresenting firms, and the size of firms’ ex ante expected costs – incorporating both the probability of getting caught and the penalties if caught – of engaging in financial misrepresentation.

Enforcement actions on banks and the structure of loan syndicates

We investigate the effect of regulatory enforcement actions on banks' reputation by estimating the effect of non-compliance with laws and regulations among lead arrangers on the structure of syndicated loans. Consistent with a regulatory reputational stigma, a punished lead arranger increases her loan share to entice participants to continue to co-finance the loan. Consequently, when punished lead arranger initiates a new syndicated loan, then this loan tends to be more concentrated and co-funded by participants with previous collaboration with the lead arranger. However, the observed share increases by punished lead arrangers are seemingly mitigated by extending the loan guarantees, performance pricing provisions, and covenants.

The risk-shifting value of payout: Evidence from bank enforcement actions

This paper reexamines whether investors value payout and why. I study abnormal stock returns around regulatory enforcement actions that restrict bank dividends and repurchases. Market reactions are significantly worse for enforced banks that pay out than for those that do not. Withstanding alternative explanations and parallel trend concerns, these results present rare, causal evidence of a value to corporate distribution. The cross-section of abnormal returns suggests that risk-shifting, not agency cost-reduction, drives payout. In my sample of distressed banks, especially around financial crises, the ability to shift risk through payout has value.

Affect Predicts Small Cigar Use in a National Sample of US Young Adults

Affect is an important dimension of risk perceptions, which are proximal determinants of little cigar and cigarillo (LCC) smoking. We examined the association among affect, risk perceptions, and current LCC use and susceptibility in a national probability sample of US young adults, aged 18-29. Structural equation models examined the effect of affect, via risk perceptions, on LCC current use and susceptibility for 772 young adults who took the 2015 Tobacco Products and Risk Perceptions Survey, which asked about affect for images related to LCCs and health risks of daily LCC use. Positive affect toward LCCs was associated with lower perceived risks of daily LCC smoking (p < .001). Lower perceived risks were associated with higher probability of current LCC smoking (p = .008) among young adults who were aware of LCCs and with susceptibility to use among young adult never LCC users (p < .001). A direct effect of positive affect on current LCC use (p < .02) and susceptibility to use LCCs also was found. Future research should investigate how regulatory policy or enforcement actions can be used to regulate LCC components (eg, flavoring, advertising, etc) that influence affect and risk perceptions.