Regulatory sanctions and their effects on the stock market : An analysis of the effects of Finansinspektionens sanctions on the sanctioned firms’ stock price.

Abstract: This paper examines the effects of Finansinspektions’ sanctions on the sanctioned companies’ stock price. Previous research shows significant abnormal returns in companies’ stock prices when negative news are announced. In several studies, an overreaction is found, meaning a reaction larger than the monetary sanction imposed on the company. This is called a reputational loss, implying that a company’s reputation worsens when it is sanctioned, leading to a loss of trust from the investors, and therefore a drop in the stock price. The previous research mostly concentrates on the announcement of criminal activity. This thesis focuses on the effects of the regulatory sanctions given out by Finansinspektionen, Sweden’s main regulatory institution on the financial markets. The analysis is done on Nordic companies. The method used is an event study to reveal abnormal returns after a sanction is announced and a regression analysis to analyse which factors affect these abnormal returns. The analysis reveals significant abnormal returns for all the studied samples. For the total sample and companies sanctioned for market information deficiencies, the abnormal returns are limited to the day of the announcement and the next few days after. Financial companies sanctioned for not respecting the capital market regulations show stronger abnormal returns than the rest of the sample for up to a month after the announcement of the sanction. The study finds a statistically significant overreaction for financial companies on the day of the announcement. This analysis indicates that larger fines lead to significantly stronger negative market reactions. Companies that have previously been sanctioned also elicit significantly larger stock market reactions. This shows that companies can benefit their shareholders by implementing compliance programs to reduce the likelihood of sanctions.