Effects of Allegations of Corporate Misconduct on Share Value: A Study on the Swedish Market

University essay from Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Abstract: We set out to determine the stock market's reaction to announcements of corporate illegalities in Sweden resulting in the company being fined or sued. By visiting the main legal authorities in Sweden, we manually collect our observations of announcements of misconduct for listed companies creating a unique dataset of 49 observations from the period January 1990 to April 2008. Using the event study methodology, we compute abnormal returns and obtain results which suggest a general trend of a nonexistent market reaction in Sweden. We conclude that the reasons for this observation is due to the fundamental structure of the legal system in Sweden where individuals rather than companies are targeted and the size of fines imposed are trivial in comparison to the firms’ market value. However, we note that firms being sued for violating the Competition Act experience a significant negative wealth loss of 1.39% following the announcement of the illegality. It proves the Swedish Competition Authority’s ability to efficiently implement its legislation. Reactions to other legislators’ law enforcement are absent which ultimately reflects Swedish companies' ability to shirk the consequences of fraudulent activities.

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