Reputational Sanctions Research Articles

'Right to Yelp Laws' and the Reputational Sanctions Market?

'Right to Yelp Laws' and the Reputational Sanctions Market?

IS “UNTRUSTWORTHY” THE NEW “THREATENING”? CHINA’S SOCIAL CREDIT SYSTEM THROUGH THE PRISM OF SECURITIZATION

China’s Social Credit System (SCS) has been portrayed in much Western media coverage as an instrument for full-scale social control that collects and analyses behavioural data on an unprecedented scale. This perception has been countered by scholars who argue that the SCS should be seen more as a tool focused on strengthening law enforcement. This article argues that the development and operations of the SCS should be understood as a long-term process of “securitisation”, intended to counter a crisis of trust in Chinese society. By introducing this “trust” discourse, the SCS creates an environment that justifies the need to employ extraordinary measures against breakers of social trust, measures that include reputational sanctions and joint punishments. Whether this securitisation process will succeed in efficiently curtailing untrustworthy behaviours in the social, political and economic spheres remains uncertain. It might be hampered by Chinese society’s limited knowledge of the SCS, as well as by the limited impact of the SCS on people’s lives. Alternatively, the introduction of measures that are too intrusive might trigger public disapproval. While ongoing local trials primarily involve schemes to reward “good” behaviour, since 2021 punitive measures targeted at trust-breakers have been standardised at the central government level. This article is based on an analysis of Chinese-language documents and its primary focus is on these centrally-designed SCS sanctions. It adds to the existing literature not only by proposing a new perspective through which the SCS may be perceived but also by discussing the measures targeted at individuals, the shape of which has been moulded by the recent standardisation activities.

The effects of reputational sanctions on culpable firms: Evidence from China’s stock markets

We examine an important yet understudied form of reputational sanction in China, namely public criticisms imposed on culpable firms by the Chinese stock exchanges from 2013 to 2018. We find significantly negative cumulative abnormal returns around the announcement date, and they were affected by several factors, including financing propensity, governance mechanism, and equity nature. However, the market reaction is significantly negative only for firms relying on external financing and non-state enterprises, and importantly, becomes insignificant in cases where the firm had self-exposed misconduct before the official announcement of public criticism. Further, we examine other effects of public criticism, finding that public criticism does not improve firms’ long-term values, nor produce strong deterrence to change their behaviour. Overall, the evidence of the effects of public criticism on culpable firms is mixed, suggesting that reputational sanction is a weak, if not ineffective, instrument of market regulation in China.

The COVID-19 pandemic and long-term incentives for developing vaccines: Patent law under stress.

Continents are facing an apocalyptic pandemic that is terribly dangerous for millions of their inhabitants. This paper seeks to address the role of intellectual property (IP) law in addressing the problem of the COVID‐19 pandemic. We suggest that the current international IP law regime and the Trade‐Related Aspects of Intellectual Property Rights Agreement are not insurmountable obstacles for access to a successful COVID‐19 vaccine. The publicly advocated fundamental reform or even abolition of the present IP law regime under serious information asymmetries might be counterproductive and distortive. Via existing compulsory licensing, advance purchase agreements and the employment of patent‐pools, research subsidies, reward mechanisms and reputational sanctions, governments can take the steps needed to effectively overcome any IP‐associated barriers to access to crucial medicines/vaccines, particularly during the COVID‐19 pandemic. Moreover, the current wave of medical research on COVID‐19 suggests the previous vaccine R&D ‘failures’ were driven by the modest demand for such vaccines and were not due to an inadequate IP‐incentive stream. The paper also suggests today's EU competition law rules on the horizontal exchange of information could be seen as an impediment to innovation and thus be temporary suspended.

A Fiscal Constitutional Crisis: Tax Avoidance and Evasion in Inter-war Britain

Abstract Inter-war Britain witnessed rising tax avoidance and evasion, reflecting a combination of elite opposition to higher tax rates and the almost complete absence of any effective legal or reputational sanctions against tax evaders. Legal tax avoidance carried little social stigma and even illegal evasion rarely led to criminal prosecution or public censure, on account of the confidential, non-judicial procedure by which cases were resolved. This paper explores how a combination of elite opposition to higher tax rates, a growing judicial ideology (especially in the higher courts) based around protecting ‘civil liberties’ (essentially construed in terms of private property rights), and an ambiguous stance on tax avoidance among policy-makers, created the conditions for the rapid growth of tax avoidance. This in turn fostered a booming tax avoidance industry that became a persistent feature of the British tax environment. The paper also explores the wider political economy of tax avoidance and evasion and how a political philosophy shared by leading judges, right-wing ‘anti-waste’ movements, some Conservative politicians, and many wealthy taxpayers, formed a precursor of neo-liberal political philosophy. Finally, it charts the changed tax climate of the late 1930s, when the growing threat of total war aligned the interests of the wealthy with those of the rest of society and allowed policy-makers to present tax payment as a patriotic duty. In this context, collective liberty and an ideology of ‘fair shares’ eclipsed the rhetoric of the rights of the propertied individual, thereby undermining the legitimacy of tax avoidance.

Commercial Military Actors and Civilian Victimization in Africa, Middle East, Latin America, and Asia, 1980–2011

Abstract The current international normative order strongly condemns strategies of civilian victimization, and actors engaging in atrocities face material, criminal, and reputational sanctions. The growth of the market for force has raised concerns about clients outsourcing atrocities to commercial military actors (CMAs), such as private military and security companies or mercenaries, and thereby circumventing accountability under international norms. This investigation explores whether interactions on the market for force are associated with an increase in the likelihood of violence against civilians. We argue that there is a variance in market interactions. While some market actors will comply with international norms, others will take advantage and circumvent normative restrictions. The crucial factor determining compliance and noncompliance are costs of norm violation, which vary across market actors. Those clients and CMAs with a higher exposure to sanctions, or an interest in the status quo of the normative order, are less likely to be associated with norm violations, and vice versa. We test our claims using a negative binomial regression and by drawing on new data from the Commercial Military Actor Dataset, which records contracting for force and force-related services. Overall, we found that there is a market segment where actors use market relations to circumvent international norms, yet mostly market interactions appear to comply with international norms.

The Effects of Reputational Sanctions on Culpable Firms: Evidence from China's Stock Markets

Reputational sanctions are widely used as a regulatory tool to curb corporate misconduct. However, existing literature on its workings and effectiveness is largely limited to developed economies. We thus examine the case of China, focusing on an important yet understudied form of reputational sanction there, namely public criticisms imposed on culpable firms by the two Chinese stock exchanges in Shanghai and Shenzhen. We construct a unique dataset of all public criticisms announced by the two Chinese stock exchanges from 2013 to 2018, and find significantly negative cumulative abnormal returns around the announcement date. Cross-sectional regression analysis finds that there are several factors affecting the short-term market reaction to public criticisms, including financing propensity, governance mechanism, and equity nature. However, further tests show that the significant negative market reaction to public criticism only appears in the firms relying on external financing and those not controlled by state ownership. Importantly, the market reaction is not significant in cases where the firm had already self-exposed misconduct before the announcement of public criticisms by the stock exchange. To have a more complete picture of the effectiveness of public criticism, our paper is the first of its kind to examine other effects of public criticism. We find that public criticism does not improve firms’ long-term values, nor produce strong deterrence to change their behaviour. Overall, the evidence of the effects of public criticism on culpable firms is mixed, suggesting that reputational sanction is a weak, if not ineffective, instrument of market regulation in China.

Reputational Sanctions as A Self-regulatory Tool of China’s Stock Exchanges: Recent Developments of the Law and Practice

Reputational Sanctions as A Self-regulatory Tool of China’s Stock Exchanges: Recent Developments of the Law and Practice

The Effects of Reputational Sanctions on Culpable Firms: Evidence from China's Stock Markets

The Effects of Reputational Sanctions on Culpable Firms: Evidence from China's Stock Markets

The Relevance of Apologies in Non-pecuniary Damages: Between Remedies and Incentives

Legal systems and their sources have significantly evolved during globalization, bringing out new ways of conceiving regulation and remedies. We can recall several examples in which certain social phenomena are treated beyond a pure ‘command and control’ approach.Think about the growing impact of self-regulation in several areas, the increasing relevance of corporate codes of conduct, the use of reputational sanctions in social networks, the emergence of public apologies in tort law. In the latter example, we may focus on many legal implications such as the opportunity to provide a safe harbour legislation in order to facilitate the settlement of disputes, the acknowledgment of mitigating effects on non-material damages, the idea of judge-ordered apologies. According to Law and Economics thought, apologies can be deemed to fall within the category of “merit goods”. They allow people to reach the difficult goal of nonmaterial compensation giving voice to personal feelings without having to translate them into money. The article shows how behavioral incentives and mediation proceedings might be more appropriate than authoritative measures in order to gain benefits from apologies. Financial law, financial stability, systematic risk, financial regulation reforms, fintech, brexit, emerging markets, financial crisis, global financial market

Comprehensibility and Accountability

Abstract In Incomprehensible!, Wendy Wagner highlights a blind spot in the design of many legal programmes: they demand that market players share as much information as possible, but neglect to demand that the information be conveyed comprehensibly. Wagner shows how the neglect of comprehensibility undermines the law’s effectiveness, and provides a menu of concrete proposals for alleviating it. Yet Wagner’s analysis leaves one important question unanswered: will making information more comprehensible necessarily lead to more accountability and better policy outcomes? This review article examines the elusive link between comprehensibility and accountability, and spotlights four common scenarios whereby the former is not a sufficient or even a necessary condition for the latter. In some markets, we have accountability without comprehensibility, through the threat of reputational sanctions. In others, we have comprehensibility without accountability: disclosures are perfectly readable, yet the end users opt not to read them. A third scenario is where more comprehensibility actually leads to less accountability: top-down mandates of comprehensibility crowd out efforts by private intermediaries to process complex information. Finally, there are circumstances where comprehensibility leads to too much accountability: in certain trade-offs, more accountability leads to worse decision making.

COVID-19 Pandemic, Long-Term Incentives for Developing Vaccines and Infectious Disease Market: IP Law under Stress

Continents are facing an apocalyptic pandemic that pose a mortal danger to millions of its citizens. This paper seeks to address the role of intellectual property law in addressing the problem of COVID-19 pandemic. We suggest that current international IP law regime and TRIPS Agreement do not pose an insurmountable impediment to access to the successful COVID-19 vaccine. Publicly advocated fundamental reform or even the abolishment of the current IP law regime under severe information asymmetries might be counterproductive and distortive. Governments can via existing compulsory licensing, advance purchase agreements and employment of patent-pools, research subsidies, reward mechanisms and reputational sanctions take necessary steps to effectively overcome any IP barriers in ensuring access to crucial medicines/vaccines especially during a COVID-19 pandemic. Moreover, the current rate of medical research on COVID-19 suggests that previous vaccine R&D “failures” were driven by rather limited demand for such vaccines and where not the problem of inadequate IP-incentive stream. Furthermore, paper suggest that the current EU competition law rules on the horizontal exchange of information might be perceived as an impediment to innovate and might be temporary suspended. In addition, paper offers several substantive insights on an improved IP related public policy respond in the war against COVID-19.

Facts and Myths about Misperceptions

Misperceptions threaten to warp mass opinion and public policy on controversial issues in politics, science, and health. What explains the prevalence and persistence of these false and unsupported beliefs, which seem to be genuinely held by many people? Though limits on cognitive resources and attention play an important role, many of the most destructive misperceptions arise in domains where individuals have weak incentives to hold accurate beliefs and strong directional motivations to endorse beliefs that are consistent with a group identity such as partisanship. These tendencies are often exploited by elites who frequently create and amplify misperceptions to influence elections and public policy. Though evidence is lacking for claims of a “post-truth” era, changes in the speed with which false information travels and the extent to which it can find receptive audiences require new approaches to counter misinformation. Reducing the propagation and influence of false claims will require further efforts to inoculate people in advance of exposure (for example, media literacy), debunk false claims that are already salient or widespread (for example, fact-checking), reduce the prevalence of low-quality information (for example, changing social media algorithms), and discourage elites from promoting false information (for example, strengthening reputational sanctions).

Fines and reputational sanctions: The case of cartels

In this article, we revive an old debate in the law and economics literature: the relative role of public and reputational sanctions in deterring misconduct. We propose an empirical framework, which accounts for public sanctions (in our case cartel fines) and a more direct measure of reputational sanctions, harnessing recent developments in opinion mining. We use the intensity and the sentiment of media exposure of misconduct as a measure of reputational effect and thus approximation of the reputational sanction. As a demonstration, we combine an event study approach, sentiment analysis, and econometric techniques on a sample of 339 listed cartel member firms, prosecuted by the European Commission between 1992 and 2015. Our results offer evidence that in the context of cartels, public and reputational sanctions act as substitutes: where there is a reputational penalty, increasing this penalty reduces the effect of the public sanction. One the other hand, in the absence of a reputational punishment, the effect of the cartel fine steps in.

Do Reputational Sanctions Deter Negligence in Information Security Management? A Field Quasi‐Experiment

Security negligence, a major cause of data breaches, occurs when an organization's information technology management fails to adequately address security vulnerabilities. By conducting a field quasi‐experiment using outgoing spam as a focal security issue, this study investigates the effectiveness of reputational sanctions in reducing security negligence in a global context. In the quasi‐experiment, a reputational sanction mechanism based on outgoing spam was established for four countries, and for each country, reputational sanctions were imposed on the 10 organizations with the largest outgoing spam volumes—that is, these organizations were listed publicly. We find that because of our reputational sanction mechanism, organizations in the four countries, including those that were not listed, reduced outgoing spam significantly compared to those in similar countries. Within each country, the listed organizations, whose reputations were actually sanctioned, reduced spam to a greater extent than those that were not listed. The spam reduction in the not‐listed organizations is mainly driven by increased security awareness, while the reduction in the listed organizations is primarily due to reputation effect. Among the listed organizations, those ranked lower were more responsive to the reputational sanctions. Moreover, we find that reputational sanctions have a stronger effect on large organizations and important organizations that provide network access and transit to others.

Public and Private Sanctions: The Case of Cartels

In this article, we revive an old debate in the law and economics literature: the relative role of public and reputational sanctions in deterring misconduct. We propose an empirical framework, which accounts for public sanctions (in our case cartel fines) and a more direct measure of reputational sanctions, harnessing recent developments in opinion mining. We use the intensity and the sentiment of media exposure of misconduct as a measure of reputational effect and thus approximation of the reputational sanction. As a demonstration, we combine an event study approach, sentiment analysis, and econometric techniques on a sample of 339 listed cartel member firms, prosecuted by the European Commission between 1992 and 2015. Our results offer evidence that in the context of cartels, public and reputational sanctions act as substitutes: where there is a reputational penalty, increasing this penalty reduces the effect of the public sanction. One the other hand, in the absence of a reputational punishment, the effect of the cartel fine steps in.

The Case for Individual Audit Partner Accountability

Despite repeated regulatory interventions, accounting failures continue to persist in companies around the world. In this Article, I explain why current law, private enforcement, and firm-level reputational sanctions are unlikely to induce accountants to take optimal levels of care when auditing corporate financials. Instead, our best chance for improving audit quality lies in establishing a market for individual audit partners’ brands — a market that can hold individual auditors responsible for their mistakes. The Article begins by identifying four key benefits to this approach. First, forcing auditors to be publicly associated with any audit failures occurring on their watch will induce them to increase their effort in order to avoid the stigma of failure. Second, now that a significant portion — frequently more than half—of audit hours are performed overseas, holding a single individual publicly accountable for any audit failures will improve monitoring of auditors in other jurisdictions. Third, in light of significant evidence of variation in the quality of audit partners — even partners within the same firm — exposing that heterogeneity will empower members of audit committees and investors to choose auditors more carefully. Finally, commoditizing individual auditors could increase industry competition without the need for aggressive regulatory action. The Article then argues that, in order to spur the development of a market in auditor reputation, lawmakers should encourage the development of Auditor Scorecards. To do so, regulators should require the disclosure of additional auditor-level information, and should ensure useful information is provided through enforcement actions. Although there are costs to these changes, those costs are likely to be outweighed by giving investors the information they need to develop a common Scorecard for auditor quality. Such Scorecards will help boards and investors make better use of the legal tools already at their disposal to hold auditors accountable when they fail in their gatekeeping function.

Social Norms and Legal Design

AbstractWe consider legal obligations against a background of social norms, for example, societal norms, professional codes of conduct, or business standards. Violations of the law trigger reputational sanctions insofar as they signal nonadherence to underlying norms, raising the issue of the design of offenses. We show that the law generally ought to follow social norms or be stricter than them. When society is only concerned with the trade-off between deterrence and enforcement costs, legal standards defining offenses should align with underlying norms so long as the latter are not too deficient. When providing productive information to third parties is also a concern, legal standards should either align with underlying norms with fines that trade off deterrence against the provision of information; or legal standards should be more demanding and enforced with purely symbolic sanctions, for example, public reprimands. Our analysis has implications for general law enforcement and regulatory policies. (JEL: D8, K4, Z13)

Political corruption and capture of the minority

AbstractThis article presents a model of political corruption in which a briber can choose either to bribe only the incumbent party or to capture also the opposition party to sterilize its monitoring role. The analysis also explores interparty collusion, media independence, and political contestability. The model suggests that policies aiming to strengthen the role of minorities can produce ambiguous effects as they may induce bribers' avoidance behavior. Reputational sanctions appear to be less effective than criminal ones, although political contestability increases their deterrence effect. Paradoxically, harsh criminal sanctions may induce tacit collusion because minorities highly regard their outcomes once in power.

Optimal non-prosecution agreements and the reputational effects of convictions

Many claim that non-prosecution agreements (NPAs) reduce deterrence by mitigating the reputational sanctions that would otherwise be imposed on corporations through plea-bargains. They suggest, based on this claim, that NPAs ought to be used infrequently. This article presents a signalling model wherein reputational sanctions emerge as a result of noisy signals produced through a firm's prosecution. It is shown that, if, as claimed, NPAs provide third parties with less information regarding a firm's wrongdoings, then firms would be willing to pay an NPA premium to avoid convictions. Thus, the NPA premium can be chosen to induce only those firms which would otherwise be over-deterred to accept NPAs. Therefore, offering NPAs with high premia is superior to the option of not using NPAs. The article also characterizes optimal NPAs, and identifies relationships between deterrence; frequency of NPA use; firms’ characteristics; and NPA terms. It explains how these relationships can be exploited to form and test hypotheses on whether convictions obtained through plea-bargains cause greater reputational harm to firms than NPAs.