Three essays on the consequences of corporate misconducts

Abstract

Corporate misconducts are pervasively existed around the world. It has attracted a great deal of attention from media, regulation, industry, and academic research. This thesis sheds light on the consequences of corporate misconducts from three perspectives, stakeholders, misconduct firms themselves, and investors. In the first session, I examine the cost of corporate fraud from syndicate bank loan contracts. The results show that creditors would punish fraudulent firms by charging higher loan spread and stricter covenants. Moreover, I find that the cost of corporate fraud is more pronounced for relationship banks. It means that relationship banks would hold up fraudulent firms by charging higher loan spread. The results therefore indicate a reputation damage of corporate fraud. In the second session, I further investigate how fraudulent firms manage to mitigate fraud revelation loss. In particular, I pay attention to change of cash policy around corporate fraud revelation. On average, I find that fraudulent firms would accumulate cash significantly after revelation of corporate fraud. Dynamic analysis also shows that in a short time period right when fraud is revealed, cash holdings would drop, indicating a reputation damage in firm performance. Further in a long time period after revelation of fraud, fraudulent firms keep saving cash out of cash flow, implying a precautionary saving of cash holdings due to long lasting financing constrains. Additional tests on value of cash and cash flow sensitivity of cash further confirm the precautionary saving argument. In the third session, I identify the trust damage of corporate fraud. Using Chinese fraud issue in Wall Street market as a unique setting, I test change of US investors’ earning announcement reaction to Chinese firms. The results find that US investors react less pronounced to Chinese firms’ earnings announcement when pervasive Chinese fraud issue is revealed from 2010 to 2012. The results are robust to difference in difference tests by comparing US listed Chinese firms to other US listed firms or Chinese domestic firms. It shows that US investors lose their trust in Chinese firms when pervasive fraud is revealed. I also find that Hong Kong investors react less pronounced to Chinese firms from 2010 to 212 compared with earnings announcement reaction from 2006 to 2009, suggesting that Hong Kong investors would update their beliefs on Chinese firms based on pervasive bad signals of Chinese firms from US.