Forgive Me All My Sins: How Penalties Imposed on Banks Travel Through Markets

48 Pages Posted: 25 May 2018

See all articles by Christian Flore

Christian Flore

Technical University of Darmstadt - Chair for Corporte Finance

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB)

Sascha Kolaric

University of Edinburgh Business School

Dirk Schiereck

Technical University of Darmstadt

Date Written: April 17, 2018

Abstract

From 2005 to 2015, the 25 largest global financial institutions paid more than 285 billion US dollars in legal penalties, corresponding to approximately 20% of their market value. We examine the stock, bond, and CDS market reaction to the announcements of fines and settlements for banks. We document positive stockholder and bondholder valuation effects as well as a tightening of CDS spreads for banks to these resolution announcements. These reactions can be attributed to the resolution of uncertainty surrounding legal proceedings. Moreover, even though monetary penalties are cash-flow-effective, they are not income-effective in the year they are announced, suggesting that banks make adequate provisions for these penalties. In addition, we observe positive spillover effects to other banks facing pending lawsuits with the same plaintiff.

Keywords: banks, lawsuits, settlements, legal fines, investors, capital markets

JEL Classification: G14, G21, K10, K41, K42

Suggested Citation

Flore, Christian and Degryse, Hans and Kolaric, Sascha and Schiereck, Dirk, Forgive Me All My Sins: How Penalties Imposed on Banks Travel Through Markets (April 17, 2018). Available at SSRN: https://ssrn.com/abstract=3178589 or http://dx.doi.org/10.2139/ssrn.3178589

Christian Flore (Contact Author)

Technical University of Darmstadt - Chair for Corporte Finance ( email )

Hochschulstrasse 1
Darmstadt, 64289
Germany

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Sascha Kolaric

University of Edinburgh Business School ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom

Dirk Schiereck

Technical University of Darmstadt ( email )

Universitaets- und Landesbibliothek Darmstadt
Magdalenenstrasse 8
Darmstadt, Hesse D-64289
Germany

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