Law enforcement spillover effects in the financial sector

Abstract

Recipient 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.