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  • Journal of Empirical Legal Studies

Is ‘Not Guilty’ the Same as ‘Innocent’? Evidence from SEC Financial Fraud Investigations

By: Eugene F. Soltes and David H. Solomon
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Abstract

When the Securities and Exchange Commission (SEC) investigates firms for financial fraud, investors learn about the investigation only if managers disclose it, or regulators sanction the firm. We investigate the effects of such disclosures using confidential records on all investigations, regardless of outcome. Even when no charges are brought, firms that voluntarily disclose an investigation underperform non-disclosing firms by 11.7 percent over the following year. Disclosure is associated with a higher chance of shareholder class action lawsuits, and more prominent disclosures are associated with worse returns. CEOs who disclose an investigation are 14 percent more likely to experience turnover. Our results are consistent with transparency about bad news being punished by financial and labor markets.

Keywords

Financial Fraud; Corporate Disclosure; Performance; Outcome or Result

Citation

Soltes, Eugene F., and David H. Solomon. "Is ‘Not Guilty’ the Same as ‘Innocent’? Evidence from SEC Financial Fraud Investigations." Journal of Empirical Legal Studies 18, no. 2 (June 2021): 287–327.
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About The Author

Eugene F. Soltes

Accounting and Management
→More Publications

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More from the Authors
  • Corporate Criminal Investigations and Prosecutions By: Leo R. Tsao, Daniel S. Kahn and Eugene F. Soltes
  • Should I Stay or Should I Go? Assessing Risk in Carlos Ghosn's International Escape By: Eugene F. Soltes, Grace Liu and Muneeb Ahmed
  • The Professionalization of Compliance By: Eugene F. Soltes
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