Corporate irresponsibility and stock price crash risk

Abstract

We investigate the impact of corporate irresponsibility on future stock price crash by employing a unique dataset of 1,529 penalties imposed on 411 United States (U.S.) firms, from 2003 to 2015. We provide robust evidence that the total amount of penalties (in U.S. dollars) imposed on firms are negatively associated with firm-specific future stock price crash risk. Our findings are consistent with the following view that imposition of penalties remove uncertainty about a particular firm's future, investors please that the case is closed, the firm successfully manages the aftermath of misconduct and the firm's financial gains are often larger compared to the total cost of the penalty imposed. Moreover, we find corporate social responsibility (CSR) to be a channel through which penalties impact stock price crash risk. Our findings demonstrate that the negative association between monetary penalties and stock price crash risk is more pronounced in the postfinancial crisis and in environmentally sensitive firms.