Until recently we have only had antectodal evidence of this (for example Enron and Salomon Brothers were the two examples I generally used in class), but a new paper by Karpoff, Lee, and Martin changes that.
They "examine the consequences to individuals and firms involved in Securities and Exchange Commission (SEC) and Department of Justice (DOJ) enforcement actions for financial misrepresentation....from 1978 through 2002."
Their findings are amazingly strong and set aside the conventional wisdom that white collar crime goes unpunished. For instance:
"A total of 501 individuals were indicted on criminal charges. Of these indictments, only three of the 341 individuals whose trials concluded by June 30, 2004 were acquitted. Sentencing information is available for 210 of the concluded cases. These 210 cases led 190 individuals to be incarcerated for an average of 4.2 years and probation or supervised release for 90 individuals (not mutually exclusive arrangements).However, what is even more remarkable is the penalty paid by the firms' investors:
(iii) Total monetary penalties [exceeded] $13.3 billion"
"The average one-day abnormal return upon the first announcement of federal involvement in a financial reporting investigation is -13.09%. This is in addition to an average loss of 25.24% associated with the prior announcement of the event ? such as an accounting restatement or change in auditor ? that triggers the investigation. Altogether, over $157 billion in shareholder value vanished when the reporting improprieties of the corporations were exposed."Wow! That is huge! Definitely deserving of an I^3 award!
Karpoff, Jonathan M., Lee, Dale Scott and Martin, Gerald, "The Cost of Cooking the Books" (December 17, 2004). http://ssrn.com/abstract=652121