Do Shareholders Benefit from Corporate Misconduct? A Long-Run Analysis


  • We sincerely thank the anonymous referee and editor, Theodore Eisenberg, at the Journal of Empirical Legal Studies for their many helpful comments and insights. We also thank Harold Black, Mark Cohen, D. Scott Lee, and Sally Simpson for their helpful comments. Any and all errors are the sole responsibility of the authors.

Samuel L. Tibbs, Assistant Professor of Finance, College of Business Sciences, Zayed University, Abu Dhabi, UAE; email: Harrell is Associate Professor, and CBA Investments Professor, The University of Tennessee, Knoxville; Shrieves is Professor Emeritus, Department of Finance, The University of Tennessee, Knoxville.


To test if shareholders benefit from corporate misconduct, we analyze long-run operating and stock performance before and after allegations are publicly disclosed. We provide the first empirical evidence that shareholders benefit from corporate misconduct. We find positive abnormal stock returns during the prediscovery period, which are only partially reversed during the postdiscovery period. Partitioning the results based on the relation between the alleged offending firm and damaged party, we find prediscovery outperformance is driven by third-party misconduct, and postdiscovery underperformance is driven by related-party misconduct. Although operating performance results are somewhat sensitive to the metric analyzed, overall they are consistent with the stock performance results. Taken as a whole, our findings provide evidence of a net benefit to shareholders from corporate misconduct when the damaged party is unrelated to the offending firm. Additionally, the disparity between postdiscovery operating performance based on the offending firm's relation with the offended party highlights the importance of reputational penalties.