Equity Prices and Cartel Activity

Abstract

We use a new data set to examine the equity price impact of announced cartel investigations. Unlike prior research, we estimate normal returns using the Fama-French (1993) three-factor model. We find that cartel investigation announcements have a long-lasting negative share-price effect of two percent, but one near zero for firms receiving leniency. The two percent loss is notably less than the estimated present value of profits lost due to cartel termination, implying that cartel participation is profitable. However, the results also suggest that the no-cheating stability condition for cartels may often not be satisfied, especially given the incentive to seek leniency.

Keywords: Event Study, Equity Prices, Cartels

JEL Classification: G14, L4