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The Impact of Anti-Bribery Enforcement Actions on Targeted Firms

Jonathan M. KarpoffUniversity of Washington

D. Scott LeeTexas A&M University

Gerald S. Martin American University

First draft: November 11, 2009This version: February 27, 2012

We thank participants at seminars at Claremont-McKenna College, the University of Utah, the NBER Conference on Finance and Ethics, American University, the Securities and ExchangeCommission, and the Oxford Symposium on Corporate Reputation for helpful comments andsuggestions on previous versions of this paper, and gratefully acknowledge financial support fromthe University of Washington’s CFO Forum and Global Business Center , and Texas A&MUniversity’s Private Enterprise Research Center , and a Shell Foundation Development ResearchGrant .


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The Impact of Anti-Bribery Enforcement Actions on Target Firms

Abstract

Firms prosecuted for foreign bribery experience significant costs. Their share valuesdecline by 3.11%, on average, on the first day that news of the bribery enforcement action isreported, and by 8.98% over all announcements related to the enforcement action. Fines, internalinvestigation costs, and losses associated with financial restatements account for 3.20% of thecumulative loss in share values, suggesting that the remainder, 5.78%, could be attributed to areputational impact. Closer inspection, however, indicates that most bribery enforcement actionsare co-mingled with charges of financial misrepresentation and fraud, and that most of thesefirms’ costs are due to the financial violations, not the bribery charges per se. Excluding cases inwhich the bribery charges are accompanied by charges of financial fraud, the mean initial loss in

share value drops to -1.60%, and the cumulative loss to -3.55%. Focusing on bribery-relatedannouncements that are not contaminated by contemporaneous charges for financialmisrepresentation, the magnitude of the initial loss drops further, to -0.47%, and is statisticallyinsignificant. These results indicate that the financial deterrents to bribery come primarily fromthe direct costs imposed by regulators, and not from an impact to the firm’s reputation withcounterparties.

JEL classification: G38; K22; K42; L51; M41

Keywords: Bribery, FCPA, penalties, financial misrepresentation, fraud


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The Impact of Anti-Bribery Enforcement Actions on Target Firms

1. Introduction

The Foreign Corrupt Practices Act of 1977 (FCPA) prohibits U.S. companies from

paying bribes to foreign government officials and politicians for the purpose of obtaining

business or to influence regulation. Only in recent years, however, has the FCPA become a

priority for U.S. law enforcement agencies. Of 115 anti-bribery enforcement actions that target

publicly traded companies in the 34 years since the FCPA was enacted, 57.4% have occurred in

the past five years (2007–2011).

The recent surge in bribery enforcement has spawned an intense debate over the costs

that anti-bribery sanctions impose on firms. The U.S. Chamber of Commerce argues that the

direct costs are large: “Businesses enmeshed in a full-blown FCPA investigation conducted by

the U.S. government have and will continue to spend enormous sums on legal fees, forensic

accounting, and other investigative costs before they are even confronted with a fine or penalty,

which … can range into the tens or hundreds of millions.” 1 The indirect costs may be even

larger: “Even a single incident [of bribery] can lead to irreparable economic hardship and

reputational damage that may adversely affect the overall stability and competitiveness of any

business.” 2 Concern about the costs of bribery enforcement actions motivated attempts to amend

U.S. bribery laws in 2010 and 2011, with new attempts planned for 2012. 3

The counterargument is that bribery enforcement actions amount to little more than a slap

on the wrist. Anecdotes suggest that firms suffer small consequences when they are caught

bribing, and that, “[T]he puny size of the penalties could provide an incentive for managers to

1 See www.instituteforlegalreform.com/restoring-balance-proposed-amendments-to-the-foreign-corruptpractices-act.html , page 5 (accessed on February 27, 2012).2 See PricewaterhouseCooper, Anti-Corruption, www.pwc.com.br/en/forensics/anti-corruption.jhtml 3 See Weismann and Smith (2010). The Searle Civil Justice Institute (2012) summarizes policy disputesabout the FCPA.


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stretch the rules” (Cass 2009). 4 The implication of this argument is that bribery-related penalties

are not too large, but rather, too small. Regulators appear to have accepted this argument. In

2008, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) worked

in concert to impose a combined $1.657 billion fine and disgorgement of funds in a bribery

enforcement action against Siemens AG. In 2009, the DOJ and SEC imposed combined fines and

disgorgement of $600.2 million on the Halliburton Company for bribery related charges. In

another highly publicized case, a total of 19 firms settled charges for paying $230 million in

bribes to Iraqi officials in the United Nations’ Oil for Food program. 5 The FBI and Department

of Justice both emphasize that anti-bribery enforcement has become a top public policy priority,

and DOJ officials have opposed attempts to weaken the FCPA (Breuer 2011). Furthermore, the

whistle-blower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act

of 2010 increase many firms’ potential liability for bribery violations. A bill introduced in the

112 th Congress in 2012, HR-3513, seeks to provide a private right of action for persons and firms

who are damaged by a foreign business that violates the FCPA, thus further increasing some

firms’ potential liabilities from bribery.

The debate over U.S. anti-bribery enforcement has evolved in the absence of data on the

size and nature of the costs to firms that are targeted by such enforcement. To address this

deficiency, this paper examines all bribery enforcement actions that target publicly traded

companies initiated by the U.S. Department of Justice (DOJ) or Securities Exchange Commission

(SEC) from 1978 through 2011. We document the frequency of such actions, the characteristics

of the target firms, the sizes and locations of the bribes, the value of the benefits sought, and the

costs imposed on target firms. These costs include the fines and penalties imposed by regulators,

the firms’ direct legal and investigation expenses, and any impacts on the firms’ reputations.

4 Cass, Dwight, “Cracks in the SEC’s Crackdown: The Securities Watchdog is Chasing High-Profile Cases, but the Fines It’s Extracting Are Peanuts,” August 12, 2009,http://money.cnn.com/2009/08/12/news/economy/sec_schapiro_fines.fortune/index.htm.5 See Manipulation of the Oil-For-Food Program by the Iraqi Regime, Independent Inquiry Committee intothe United Nations Oil for Food Program (Paul Volcker, Chairman), New York, NY: IIC, 2005.


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On the surface, the data seem to support the view that bribery enforcement actions

impose meaningful costs on the targeted firms. Total monetary penalties imposed by the SEC

and DOJ, plus settlements from class action and derivative lawsuits, average 0.98% of the target

firm’s market value, and the total costs of internal investigations and legal fees consume an

additional 1.13% of market value, on average. Indirect costs, such as lost reputation, appear to be

even larger. The mean one-day share price reaction to the initial revelation of bribery is -3.11%.

Cumulating over all key announcements about the bribery and the related enforcement action, the

mean loss in share values is 8.98%.

Closer inspection, however, reveals that most of these consequences are not due to the

revelation of bribery or bribery-related enforcement activities per se. Rather, most bribery

enforcement activities are accompanied by charges that the company misreported its financial

statements; a small number also are accompanied by charges of financial fraud. We partition the

data along two dimensions to isolate the incremental impact of the bribery charges and

enforcement actions. The results show that most of these firms’ direct and indirect penalties are

for financial misrepresentation or fraud, not bribery.

First, we partition the sample according to whether the bribery charges are accompanied

by charges of financial fraud. When financial fraud charges are included, the total direct costs

average 3.47% of market capitalization, compared to 1.94% when they are not. More

importantly, indirect costs average 48.11% of market capitalization when fraud charges are

involved, as compared to 1.61% when they are not. In fact, the median estimate of indirect cost is

negative 0.51% for anti-bribery enforcement actions that involve no charges of financial fraud.

Second, we isolate the incremental effects of bribery charges by partitioning each

announcement about the regulatory charges and penalties into disclosures about bribery alone,

financial misrepresentation alone, or a mix of the two. Even firms that do not face charges for

financial fraud typically face charges for financial misrepresentation, if for no other reason than

to cover up the bribe payments. When the initial revelation of bribery-related misconduct


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discloses both bribery and financial misrepresentation, the one-day abnormal stock return is

-1.85%. When the announcement discloses only financial misrepresentation (that subsequently is

related to bribery activity), the one-day abnormal return is -9.92%. But when the initial

announcement discloses only bribery, with no mention of financial misrepresentation, the one-

day abnormal stock return is -0.47% and is not statistically significant. Cumulating these

partitioned abnormal stock returns for each enforcement action, we find that misrepresentation

announcements are associated with a mean cumulative abnormal return of -5.34%, compared to a

mean of -0.60% for bribery-only announcements and -0.75% for the mixed bribery-and-

misrepresentation announcements.

These results indicate that, while the direct and indirect costs associated with bribery

enforcement actions are significant, most of these costs are attributable to financial misconduct,

not bribery. Most notably, when the bribery is accompanied by charges of financial fraud, the

direct and indirect penalties are large. This, in turn, implies that firms face large penalties for

misleading investors, not for bribery per se.

This paper proceeds as follows. Section 2 provides a brief history and description of the

Foreign Corrupt Practices Act of 1977 and related research. Section 3 describes the data used in

our analysis. Section 4 reports descriptive statistics on the characteristics of firms that are

targeted for bribery enforcement, the location and sizes of the bribes paid, and the benefits sought

by the bribing firms. Section 5 reports on the share value effects of announcements that reveal

the initiation of enforcement activities and the subsequent penalties imposed on targeted firms.

Section 6 reports on the direct costs incurred by targeted firms, including fines, penalties, lawsuit

settlements, investigation expenses, and legal expenses. Section 7 examines the indirect costs,

including the effects of financial restatements and the reputational costs borne by the targeted

firms. Section 8 concludes with a discussion of the implications of these findings.


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2. The Foreign Corrupt Practices Act of 1977

In 1975, the International Chamber of Commerce (ICC) established the Shawcross

committee to recommend steps to combat corporate extortion and bribery. The following year,

the former Prime Minister of Japan was charged with and subsequently imprisoned for taking $2

million in bribes for assisting Lockheed Corporation in selling 21 jets to a Japanese airline.

Subsequent revelations indicated that many U.S. firms were bribing foreign officials to obtain

business and misrepresenting their financial statements to avoid detection by auditors and

investors. Contemporaneously, congressional investigations into the Watergate scandal revealed

that many corporations maintained slush funds to court favor from both domestic and foreign

government officials. In response, the SEC proposed an amnesty period to encourage firms to

conduct independent internal investigations and voluntarily disclose questionable payments.

More than 500 firms, including 100 firms in the Fortune 500, subsequently disclosed illicit

payments that exceeded $300 million.

Subsequently, Congress passed the Foreign Corrupt Practices Act of 1977 (FCPA). As

amended by the Act, 15 U.S.C. §§ 78dd (30A in the Securities Exchange Act of 1934) prohibits

any issuer, domestic concern, or other persons from obtaining anything of value by corruptly

making payments. Before 1977, federal powers to prosecute foreign bribery relied primarily on

anti-fraud and money laundering provisions of the Currency and Foreign Transactions Reporting

Act and the Travel Act. Enforcing these statutes proved difficult because they required proof of

intent ( scienter ), racketeering, or failure to report foreign currency transactions. With the FCPA,

the SEC and DOJ now could impose civil and criminal penalties for bribery in and of itself.

Pre-FCPA investigations revealed that many firms maintained secret accounts to facilitate

their bribe payments. To aid in the prosecution of its anti-bribery rules, the FCPA also added

three financial reporting provisions: (i) 15 U.S.C. §§ 78m(b)(2)(A), which requires firms to keep

and maintain books and records that accurately reflect all transactions; (ii) 15 U.S.C. §§

78m(b)(2)(B), which requires firms to devise and maintain a system of internal accounting


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controls; and (iii) 15 U.S.C. §§ 78m(b)(5), in which no person shall knowingly circumvent or

knowingly fail to implement a system of internal accounting controls or knowingly falsify any

book, record, or account. 6 As reported below, most enforcement actions for bribery also invoke

charges of financial misrepresentation. Our tests exploit this fact to isolate the impact of bribery

charges on the targeted firms.

The FCPA is the topic of extensive discussion in the legal literature (e.g., see Cohan,

Holland and Wolf, 2008; Davis, 2002; Dugan and Lechtman, 1997; Erbstoesser, Struck and

Chesley, 2007; Huskins, 2007; and Timmeny, 1982). Researchers also have examined the

general influence of corruption and trust on economic performance (e.g., see Shleifer and Vishny

1993, 1994; Guiso, Sapienza, and Zingales 2009) and whether bribery is inherently wrong

(Green, 2005). But there is very little empirical research on the FCPA and the effects of anti-

bribery enforcement activity. Hines (1995) reports that the FCPA decreased U.S. firms’

operations in foreign countries, although Graham (1984) reports no effect on U.S. firms’ market

shares. Cheung, Rau and Stouraitis (2011) examine the characteristics of bribes and bribe-payers

using a sample that includes 41 U.S. firms. They find that prior to paying bribes, firms tend to be

poor performers compared to their peers that do not pay bribes. Smith, Stettler, and Beedles

(1984) examine share price reactions to announcements by 98 firms that voluntarily reported

payments to foreign government officials during the SEC’s pre-FCPA amnesty program that

ended in 1978. The mean share price reaction is negative, and Smith et al. conjecture that this

reflects investors’ expectations of future government sanctions or the loss of future business.

This conjecture anticipates the current policy debate over the sizes of the direct and indirect

penalties for firms that are targeted in FCPA-related anti-bribery enforcement actions.

6 Two additional rules were added by the SEC to the Code of Federal Regulations to aid in enforcement ofthese provisions for entities that have a security registered pursuant to Section 12 of the Securities Act:13b2-1 (17 CFR 240 13b2-1) and 13b2-2 (17 CFR 240 13b2-2) . Maher (1981) and Shearing and Sterling(2012) provide detailed descriptions of the 1977 law that introduced these provisions.


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3. Data

Our sample consists of all enforcement actions initiated by the SEC and DOJ from

January 1, 1978 through December 31, 2011 for foreign bribery under the Foreign Corrupt

Practices Act of 1977. Most (95%) of the enforcement actions in our sample incorporate other

charges, including aiding and abetting, conspiracy, civil and criminal fraud, racketeering, and tax

evasion. We document all such charges, and also track all related class action and derivative

lawsuits associated with each enforcement action. Table A-1 in the Appendix reports these data

in detail.

To identify the enforcement actions, we searched for specific references to the bribery

provisions of the FCPA (e.g. sections 78dd-1 through 78dd-3 and 30A) using the Lexis-Nexis

FEDSEC:SECREL library and the PACER database. 7 To assure that we did not miss any bribery

enforcement actions that used other provisions of the U.S. code without including bribery charges

explicitly, we also searched for the terms “bribery”, “Foreign Corrupt Practices Act”, and

“FCPA,” and read all resulting SEC and DOJ proceedings to determine if a violation included

illegal payments to foreign officials. Since September 19, 1995, the SEC has posted selected

enforcement releases at www.sec.gov . The Department of Justice provided us additional

enforcement data for the civil and criminal enforcement proceedings for which the DOJ was

involved. Finally, we used EDGAR, PACER, Dow Jones’ Factiva, and Lexis-Nexis’ Legal

Research and General News categories to gather additional information and news releases

pertaining to the enforcement actions, including related class action and derivative lawsuits.

7 The Lexis-Nexis FEDSEC:SECREL library contains public releases from all SEC securities enforcementactions, and the PACER Service Center (pacer.psc.uscourts.gov) contains federal court documents.


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4. Descriptive statistics on bribery enforcement, bribe payments, and bribe payers

4.1. The time trend of enforcement actions

The DOJ and SEC initiated a total of 175 bribery-related enforcement actions from

January 1978 through December 2011. Of these, 53 target private entities, including individuals,

foreign firms with no securities traded on US exchanges, and one foreign affiliate of a private US

accounting firm. 8 Five actions involve publicly traded firms that lack CRSP and Compustat

coverage, and two additional actions involving recidivist firms (Baker Hughes, Inc. and ABB

Ltd) were excluded to avoid having each firm’s second violation period overlapping the

enforcement period for its first offense. The remaining 115 enforcement actions involve bribery

by agents working for publicly traded companies, and constitute the sample used in this study.

Figure 1 shows the chronological distribution of these enforcement actions. From 1978 through

2006, the median number of actions per year is one. Enforcement activity increased sharply in

2007, peaking with 19 actions initiated in 2010. Of the 82 actions initiated since 2004, 19 involve

the United Nations’ Oil-for-Food bribery scandal in Iraq.

4.2. Characteristics of bribing firms

Table 1 partitions the 115 sample firms across industries and firm size deciles. We use

SIC codes to group firms according to the industry definitions used by Transparency International

(TI), and list the industries in declining order of TI’s Sector Score. The Sector Score is an index

that reflects survey respondents’ view of the frequency with which firms in the industry pay

bribes. It is scaled from 0 to 10, with lower numbers associated with industries where bribe

paying is common practice. According to the Sector Score, perceived bribery is least common in

the Agriculture industry and most common in Public works contracts and construction.

8 The 53 actions include the highly publicized action against U.S. Representative William J. Jefferson (D-LA). Jefferson was convicted of using his office to solicit bribes to promote telecommunications deals in

Nigeria, Ghana and elsewhere; oil concessions in Equatorial Guinea; satellite transmission contracts inBotswana, Equatorial Guinea and the Republic of Congo; and development of different plants and facilitiesin Nigeria.


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The industries with the most frequent bribery enforcement actions are Heavy

Manufacturing (46 actions), Oil and Gas (19), and Pharmaceutical and Healthcare (13). As

shown in the table, however, this frequent incidence reflects the large number of publicly traded

firms in these industries. TI’s Heavy Manufacturing industry accounts for 40.0% of the 115

bribery-related enforcement actions, but this industry includes 16.9% of all CRSP-listed firms.

As a fraction of the number of firms in the industry, the industry with the highest number of

bribery-related enforcement actions is Arms, Defense, and Military (27.6% of firms). Although

TI’s Sector Score ranks Agriculture as the industry whose firms are least likely to bribe, a total of

14.8% of firms in this industry have been targeted by anti-bribery enforcement actions. Chi-

square tests of proportionate frequencies reject the hypotheses that the sample is distributed

equally across industries, either in terms of total actions or the fraction of firms in the industry

targeted for enforcement (p < 0.001 in both tests).

Table 1 describes two additional characteristics of the firms targeted for bribery

enforcement actions. First, targeted firms tend to have high equity value. More than half (59) of

the targeted firms reside in the largest decile of CRSP-listed firms, and none are in the smallest

three deciles. A Chi-square test of proportionate frequencies rejects the hypothesis that the

sample is distributed equally across size deciles (p < 0.001). Second, there is no significant

relation between the incidence of bribery enforcement actions and TI’s Sector Score. Indeed, the

correlation is positive 0.059, indicating a slight (statistically insignificant) tendency for bribery

actions to target firms in industries that should experience relatively little bribery, according to

TI’s ranking. This suggests either that the respondents to TI’s Sector Score are misinformed or

that targets of bribery enforcements are selected for reasons other than the industry-based

frequency of bribes.

Table 2 reports on the home countries of the bribing firms. The FCPA is a U.S. law, but

the enforcement agencies have jurisdiction over all firms that issue securities or have business

operations in the United States. So, although most (87) of the targeted companies are


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incorporated in the United States, the sample includes 21 foreign firms with ADRs traded in U.S.

markets, and seven foreign firms with equity listed on U.S. exchanges. Most of the foreign firms

(82%) have been targeted for enforcement action since 2005.

Table 2 also reports TI’s Bribe Payers Index (BPI) for each country that was home to a

firm charged with bribery. The BPI is based on a survey of business executives, and ranks 28

countries with the world’s largest economies by the likelihood that companies from these

countries will pay bribes in other countries. A low BPI indicates a country where bribe paying is

commonplace (Russia has the lowest BPI of 6.1). A high BPI indicates countries whose

companies are less likely to pay bribes. (The Netherlands, Sweden and Switzerland share the

highest BPI of 8.8. The BPI for the United States is 8.3.) Although the largest FCPA-related fine

was imposed on a German company (Siemens), the BPI for Germany is relatively high (8.6). 9

Table 3 reports two logistic regressions that examine the characteristics of bribing firms.

The data consist of a yearly panel from 1978 through 2011 using data on all Compustat-listed

firms. In Model 1, the (untransformed) dependent variable equals one for a firm targeted for a

bribery violation in the year the enforcement action was initiated. In Model 2, the dependent

variable equals one for the targeted firm in every year that the firm was accused of paying bribes.

So, Model 1 measures the characteristics of firms accused of bribery in the year they are accused,

whereas Model 2 measures the characteristics of these same firms during the years in which they

engaged in bribery. The right-hand side variables measure each firm’s size, profitability,

leverage, asset characteristics, and reliance on foreign sales. We also include dummy variables

for the firm’s industry, year, and the presence of a top quality auditor. The results in Table 3

indicate that the probability that a bribe will be revealed (Model 1), or is ongoing (Model 2), is

9 Seven firms accused of bribery are domiciled in countries not represented in TI’s BPI. For these weemploy BPI scores from countries we judged as regionally and culturally similar to the missing country asBPI proxies. We use Sweden’s BPI for Norway. For Panama and Bermuda, we average the BPIs of theUnited States, Brazil, Argentina and Mexico. For Denmark, we average the BPIs of Germany, Netherlandsand Sweden. For Hungary, we averaged the BPIs of Germany, Italy and Russia, and for Luxembourg, weaveraged the BPIs of Belgium, France and Germany. These are undeniably arbitrary judgments, but theyonly affect seven (6.1%) of the 115 sample observations.


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positively related to firm size, leverage, and the fraction of sales made in foreign countries. Both

probabilities are negatively related to the firm’s market to book ratio, and the probability that a

bribe is revealed is negatively related to the firm’s current ratio. Overall, the data indicate that

the firms apprehended for foreign bribery tend to be large manufacturing firms that rely heavily

on sales in foreign countries, are heavily leveraged, have low cash holdings, and have low market

to book ratios. Examples of such companies, which appear in our sample, include Lucent

Technologies Inc., Ingersoll-Rand Co., Ltd., Textron Inc., and The Dow Chemical Co. 10

4.3. Where do bribes occur?

Table 4 reports on the countries where bribes were paid. The country with the most

bribery enforcement actions is Iraq (24 times), followed by Nigeria (23), China (21), Indonesia

(13), and Saudi Arabia (10). The total across countries exceeds the total enforcement actions

(115) because many actions involve charges of bribery in more than one country. As an example,

Dimon, Inc. (now known as Alliance One International, Inc.) paid more than $3 million in bribes

to Kyrgyzstan government officials to purchase Kyrgyz tobacco for resale to Dimon's customers,

and also paid bribes of more than $1.2 million to government officials of the Thailand Tobacco

Monopoly to obtain more than $18.3 million in sales contracts. 11

Table 4 also reports three measures of the tendency for bribes to occur in a country. The

first is Transparency International’s 2010 Corruption Perceptions Index (CPI) and its

corresponding rank for each country. For example, Nigeria’s CPI of 2.4 ranks it 143 th in

perceived corruption. At the opposite end of the CPI spectrum, Singapore’s CPI of 9.2 ranks it as

10 Consistent with Model 2, Cheung, Rau and Stouraitis (2011) also find that firms engaged in bribery tend

to be larger and more levered than their peers. Unlike our results, however, Cheung et al. find that firmsengaged in bribery have relatively high market to book ratios. This difference may reflect sampledifferences. For example, our sample consists mostly of firms domiciled firms in the U.S. (75.7%),whereas the Cheung, et al. (2011) sample includes only 38.3% U.S. domiciled firms.11 Cheung, et. al. (2011) differ somewhat on this dimension also. In their sample, Japanese entities receiveover a quarter (27) of the bribes in their sample, whereas our sample includes only one bribe recipient inJapan. Our sample’s leading country for briberies (24 actions) is Iraq, which appears only once in thesample of Cheung, et. al. (2011). On the other hand, Nigeria, China and Indonesia appear frequently in

both samples.


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the least corrupt country where bribes occurred (according to the business executives and analysts

surveyed by TI). The second measure reported in Table 4 is TI’s Global Corruption Barometer

(GCB), which is based on surveys of the general public, and the third is the United Nations’

Human Development Index (HDI). Both the GCB and HDI are scaled from 0 to 1. A value of 1

on the GCB scale indicates the worst (perceived) corruption. A value of 1 on the HDI indicates

the highest level of development based on three dimensions: life expectancy, adult literacy, and

standard of living.

Table 4 shows that bribe payments associated with FCPA-related enforcement actions

tend to occur in countries with a reputation for corruption and poor development. The mean CPI

for all countries named in bribery enforcement actions is 3.6, which corresponds to the bottom

tercile (i.e., most corrupt) of countries when ranked by their CPI measures. The mean GCB for

countries named in bribery enforcement actions is 0.340, which corresponds to the top tercile

(most corrupt) of countries when ranked by their GCB measures. The mean HDI is 0.667, which

corresponds to the bottom tercile (least developed) of countries ranked by the HDI.

4.4. Amounts paid and benefits received

One of the necessary requirements for a payment to be considered a bribe is that it must

be paid with the purpose of receiving something of value. Table 5, Panel A, indicates that bribe-

paying firms intended to stimulate sales in 95 (82.6%) of the 115 actions, to secure political or

regulatory favors in 23 (20.0%) actions, and to reduce taxes in five (4.2%) actions. Because eight

firms had multiple purposes for their bribes, the sum of these percentages exceeds 100%. In the

Dimon, Inc. case cited above, for example, the firm made improper payments to Kyrgyzstan

government officials both to procure tobacco and also to decrease its tax liability. An example of

pure tax avoidance occurred in 2001, when Baker Hughes paid an Indonesian official $75,000 for

the purpose of reducing a $3.2 million tax assessment against PT Eastman Christiensen, an

Indonesian corporation controlled by Baker Hughes.


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Panel B of Table 5 reports on the bribe payment amounts, the amount of business the

bribes were intended to garner for the firm, and the net gains that the bribing firm expected to

receive. The data come from narratives in the SEC and DOJ enforcement releases. The mean

bribe stretched over 5.09 years (median of 4.0 years) and paid $26.85 million (median of $1.0

million). At the extreme, Siemens AG paid $1.79 billion in bribes in ten countries over a 24.75-

year period, and Montedison SpA and Halliburton each paid bribes exceeding $100 million.

Panel B also provides information about the sales that most bribes were intended to

garner, and the net benefits to the bribing firms. Our information comes from the SEC and DOJ,

which must calculate the bribe-related gains to determine the firms’ penalties. 12 Buckberg and

Dunbar (2008) state that the SEC and DOJ calculations emerge from a process that begins with

the SEC or DOJ providing a “reasonable approximation” of the defendant’s illegal sales and

profit, at which time the burden of rebuttal falls on the defendant to demonstrate whether the

SEC’s calculation exceeds sales and profits that are related to the misconduct. The process for

determining the bribe-related benefits has stimulated considerable legal debate, but they provide

the most objective estimate of expected benefits available. It is noteworthy that since the early

1990s, the SEC and courts have relied on event studies and other methods familiar to financial

economists to estimate the pecuniary gains and amounts to be disgorged (Mitchell and Netter,

1994).

For 97 of the 115 enforcement actions in our sample, information about the firm’s net

gains is available from SEC and/or DOJ releases. (In 54 actions, the information comes from the

disgorgement paid by the firm, and in 42 actions, the net gain is reported verbatim.) In 17

additional actions, SEC and/or DOJ releases report on the incremental sales the firm earned, or

expected to earn, from the bribe. And in one action involving American Totalisator Co., the

12The penalties include fines and disgorgement plus pre-judgment interest of ill-gotten gains. Thecalculation of the bribe-related benefits are guided by the U.S. Federal Sentencing Guidelines, which statethat, “‘Pecuniary gain’ … means the additional before-tax profit to the defendant resulting from therelevant conduct of the offense. Gain can result from either additional revenue or cost savings” (Seewww.ussc.gov/Guidelines/2011_Guidelines/Manual_HTML/Chapter_8.htm , accessed February 27, 2012.)


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value of the ill-gotten contract was collected from a newswire announcement issued when the

contract was awarded. For these 18 actions in which we do not have SEC or DOJ calculations of

the size of the net benefit, we estimate the net benefit by multiplying each firm’s bribery-related

sales by its profit margin (from Compustat) during the years the bribery payments were made.

For the 95 briberies intended to garner sales, the expected sales increase averaged

$1,017.93 million (median = $36.56 million). On average, the ratio of the bribe to the sales

influenced is 5.71% (median is 3.30%). Expressed differently, the average bribing firm paid

$5.71 to generate $100 of additional expected revenue, or $3.30 if we focus on the median. In the

extreme, one bribing firm paid $40 to generate $100 of additional expected revenue.

On average, the fraction of the mean expected bribe-generated sales to the firm’s total

sales across the entire violation period is 4.97% (median = 0.36%). (In the extreme, one firm

expected to generate two dollars of additional sales for every dollar of current sales.) These

numbers indicate that typical bribe payments affected a small, but meaningful fraction of these

firms’ business activities.

The mean expected pecuniary gain (sales net of expenses including the bribe) is $30.66

million, and the median is $2.56 million. The bottom row of Panel B reports a mean ratio of the

expected pecuniary gain to the bribe of 1.35. Thus, for every $1 expended on bribes, the mean

expected before-tax benefit was $1.35 and the median was $2.46. At one extreme, ERHC

Energy, Inc. paid a bribe of $100,000 to obtain sales from 2004 – 2007 that were expected to

generate $20.48 million in profits, a benefit-to-bribe ratio of 204.80. At the other extreme, in

1993 Litton Industries paid a $16.3 million bribe to obtain a $197 million contract that the

Department of Justice estimated generated a profit of $2.1 million, a benefit-to-bribe ratio of only

0.13.

These estimates imply that bribe recipients tend to extract a large fraction of the gains

that the bribes are intended to garner. Indeed, the Litton Industries example seems perverse, as it

is not clear why a firm would pay more in bribes than the affected business is worth. We


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conjecture that these estimates are affected by measurement error and/or agency problems in the

bribe paying firms. Measurement errors can arise if SEC and DOJ officials generate conservative

estimates of net gain to avoid costly fights over the penalties to be imposed upon the target firm.

Agency problems can arise if the firm’s managers extract some of the gain from the bribe-related

business activity. In some cases, for example, the bribe-paying manager and bribe-receiving

government official might both benefit at the expense of the bribe-paying firm’s shareholders. 13

5. The impacts of bribery enforcement activity on share values

5.1. Initial revelation of misconduct

We are interested in measuring the extent to which bribery enforcement actions impose

costs on the targeted firms, and the nature of those costs. As a first step, we measure the share

value effects that occur when investors learn that a firm is the subject of an enforcement action

for foreign bribery. Abnormal returns are calculated by subtracting the CRSP value-weighted

index of all stocks from the raw return of the firm’s equity. Parametric t-statistics for the mean

abnormal returns are calculated from the cross-section standard error of abnormal returns. We

also report median abnormal returns and significance levels using the Mann-Whitney test.

Bribery-related enforcement actions usually involve a complex sequence of news reports,

lawsuits, enforcement activities, and penalties that relate to the targeted firm’s misconduct. The

average action in our sample has 4.99 such announcements that contain new information about

the bribe and the corresponding penalties. That is, in addition to the initial revelation about the

bribe, there is an average of 3.99 additional announcements about the nature of the bribery and

13 Although agency issues can affect managers’ incentives to pay bribes, we do not pursue this line ofinquiry in this paper. Rather, we seek to measure the consequences of bribery enforcement activity for firmvalue. Cheung, Rau and Stouraitis (2011) estimate an average benefit to bribe ratio of between 10.18 and11.46. Their estimation procedure and sample, however, differs substantially from ours. Cheung, Rau andStouraitis (2011) use an event study to estimate the benefit to the bribe paying firm, and use a sampledrawn from several countries that ends in 2007. We use SEC and DOJ estimates of the benefits to the bribe

paying firm, using all enforcement actions initiated by U.S. enforcement agencies through 2011; 44.7% ofour sample occurs after 2007.


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the penalties imposed by the SEC and DOJ. In identifying the additional announcements, we

ignore multiple news stories that convey information that previously was made public in prior

press releases or SEC and DOJ proceedings.

Panel A of Table 6 reports the average one-day market-adjusted return for the initial

revelation of each bribery enforcement action. Averaging over all 115 firms, the mean one-day

abnormal return is -3.11% and the median is -0.26%, with both the t-statistic and Wilcoxon z-

statistic significant at the 1% level. Thus, on average, the initial announcement of misconduct

that involves bribery is associated with a significant decrease in the firm’s share values.

In most actions, the SEC and/or DOJ bring charges for other violations in addition to the

charges of bribery. Appendix Table A-1 reports on the full range of these related charges. The

most important related charges, in terms of their valuation effects, relate to financial misconduct.

In 13 of the 115 enforcement actions, the bribery charges were accompanied by charges of

financial fraud. The mean one-day abnormal return upon the initial revelation of bribery charges

for these 13 firms is -14.91% (median = -3.33%). For the remaining 102 firms, the mean one-day

abnormal return is -1.60% (median = -0.15%). The difference in these average one-day returns is

statistically significant. Hence, the average abnormal return for firms that face contemporaneous

fraud charges is much larger in magnitude than it is for firms that do not face fraud charges. This

indicates that one of the driving forces behind the negative abnormal returns associated with

bribery enforcement actions is the contemporaneous revelation of financial fraud.

A further distinction is that the information reported in the initial announcement of firm

misconduct varies in a systematic way across firms. Almost all bribery actions include charges

for financial misrepresentation, as the bribing firms must manage their financial reports to hide

the bribe payments. In 74 actions, the initial announcement revealing that the firm engaged in

illegal bribery focused only on the bribery; information about financial misrepresentation comes

later. For example, on August 7, 2009, the 10-Q of Watts Water Technologies, Inc. reported that:


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We have received information regarding possible improper payments to foreigngovernment officials by employees of Watts Valve (Changsha) Co., Ltd., an indirectwholly owned subsidiary of the Company in China. Such payments may violate theForeign Corrupt Practices Act. We are conducting an investigation utilizing outsidecounsel and voluntarily disclosed this matter to the United States Department of Justiceand the Securities and Exchange Commission. We cannot predict the outcome of thismatter at this time or whether it will have a materially adverse impact on our financialcondition or results of operations. 14

In 28 actions, the initial revelation of the firm’s bribery also contains information about the firm’s

financial misrepresentation. For example, on March 13, 2006, a newswire release reported:

Pride International, Inc. (NYSE: PDE) announced today that it will delay the filing of its2005 annual report on Form 10-K until after its due date on March 16, 2006. TheCompany has received allegations relating to improper payments to foreign governmentofficials beginning a number of years ago in connection with certain of its overseasoperations, as well as corresponding accounting entries and internal control issues. TheAudit Committee of the Board of Directors is overseeing an investigation by outsidecounsel of such allegations. At this time, the Company does not know whether theallegations will be substantiated, and if so, who may be implicated or what impact theallegations or the investigation may have on the Company, the Company's business or theCompany's financial statements. 15

In the 13 remaining actions, the initial announcement of misconduct focuses only on the financial

misrepresentation and does not explicitly mention bribery. For example, on February 9, 2006,

UTStarcom’s 8-K stated that:

At the request of the UTStarcom management team, the Audit Committee of the Board ofDirectors of the Company has initiated an investigation by independent counsel withregard to the circumstances surrounding the premature recognition of revenue on acontract with a customer in India, and other related issues. The Company recognizedapproximately $22 million in revenue on the contract, with total gross margin of less thanone million dollars. This revenue was recognized during several of the quarters from2003 through 2005. At the conclusion of this investigation, the Audit Committee willassess the findings, and will evaluate the materiality of any adjustments to determine if

previously issued financial statements need to be adjusted. 16

When we partition the 115 initial announcements according to content (Panel A of Table

6), the market reactions suggest that investors are more concerned about financial

14 www.sec.gov/Archives/edgar/data/795403/000110465909048049/a09-18466_110q.htm (page 34).15 "Pride International Delays Filing of Form 10-K and Reschedules Earnings Release Date." PR Newswire, Mar 13, 2006. http://lib-ezproxy.tamu.edu:2048/login?url=http://search.proquest.com/docview/451209920?accountid=7082.16 “UTStarcom Releases Preliminary Fourth Quarter 2005 Financial Results." PR Newswire, Feb 09, 2006.http://lib-ezproxy.tamu.edu:2048/login?url=http://search.proquest.com/docview/451258273?accountid=7082.


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misrepresentation than they are about bribery. For the 74 initial announcements that disclose

bribery only (e.g., Watts Water Technologies, Inc.) the median market-adjusted return is -0.74%

(median of -0.03%), and is statistically insignificant. In contrast, the 28 initial announcements

that disclose both bribery and financial misrepresentation (e.g., Pride International, Inc.) result in

an average abnormal return of -2.83% (median of -1.13%), and the 13 initial announcements that

disclose only the financial misrepresentation (e.g., UTStarcom) result in an average abnormal

return of -17.19% (median of -8.48%). The abnormal returns associated with each successive

group are significantly worse than those of the preceding group, consistent with the conjecture

that the shareholder losses associated with these revelations are driven by investor concerns over

financial misrepresentation, and not by concerns over bribery.

Partitioning each of the subgroups of initial announcements into those that were or were

not associated with financial fraud leads to similar inferences about what drives the market losses

associated with bribery revelations. Of the 74 initial announcements that mention bribery only,

71 actions involve no financial fraud. The mean one-day abnormal return for these 71 actions is

-0.47% (median of -0.02%), which is in contrast to a mean abnormal return of -7.01% (median of

-0.55%) for the three remaining fraud-tainted actions. Of the 28 initial announcements with

commingled bribery and misrepresentation revelations, 22 involved no financial fraud and have a

mean one-day abnormal return of -1.85% (median of -0.43%). This is in contrast to the

significantly larger mean abnormal loss of -6.45% (median of -2.91%) for the 6 remaining actions

that involve fraud. Finally, of the 13 initial announcements that mentioned misrepresentation

only, 9 actions involving no fraud have a mean abnormal return of -9.92% (median of -3.43%).

For the 4 actions in this subgroup that had fraud charges, the mean abnormal return is -33.53%

(median of -31.96%).

The results in Panel A of Table 5 indicate that, on average, the initial revelation of

misconduct that leads to enforcement activity for bribery is associated with a significant decrease

in the target firm’s share value. The decrease, however, is concentrated among firms that are


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prosecuted for financial fraud, and among announcements that contain information about

financial misrepresentation. Initial revelation announcements that are solely about bribery are

associated with statistically insignificant initial share price reactions.

5.2. Subsequent announcements

In addition to the initial announcement of misconduct, subsequent announcements reveal

important information about the nature of the bribery, the financial misrepresentation and/or fraud

in which the firm engaged to cover up the bribery, and the penalties imposed on the targeted firm.

In total, there are 459 such subsequent announcements related to the 115 bribery enforcement

actions, an average of 3.99 per action. Panel B of Table 5 summarizes the effects of these

announcements on share values.

Averaging over all 459 subsequent announcements, the mean one-day abnormal return is

-1.47%, with a median of -0.55%. Thus, the subsequent announcements contain important

information that, on average, is associated with decreases in share values. Once again, the size of

the abnormal return depends on the presence of contemporaneous fraud charges and the specific

content of the announcement. For the 309 follow-up announcements associated with the 102

actions that did not involve financial fraud, the mean one-day abnormal return is -0.64% (median

of -0.32%), compared to -3.18% (median of -1.12%) for 150 follow-up announcements associated

with the 13 actions that involve financial fraud.

Among 309 follow-up announcements for 102 actions that involve no fraud charges, 125

announcements mention only bribery and 19 announcements mention only financial misconduct.

The mean one-day abnormal return for news of bribery alone is -0.46% (median of -0.23%), as

compared to a significantly larger mean of -3.50% (median of -1.30%) for news about financial

misrepresentation. A similar pattern exists for subsequent announcements for actions involving

financial fraud. Here, 19 announcements mention only bribery and have a mean abnormal return

of -1.02% (median -0.43%); 106 announcements contain information about financial misconduct,


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and have a mean abnormal return of -4.21% (median of -1.51%). These results indicate that both

initial and follow-up announcements about firms violating the anti-bribery law lead to decreases

in share values. However, most of the losses in share value occur in response to announcements

about the firm’s financial misrepresentation and/or fraud, not to revelations of bribery.

5.3. Cumulative abnormal returns

Panel C reports on the abnormal returns cumulated over all informational events available

for each action in the sample. The cumulative abnormal return for firm j is

CAR(k) j is the sum of the one-day abnormal returns, ARe(k),j , summed over the n(k) j unique events

that convey information about firm j’s bribery and the related penalties. The identifier k refers to

the type of information conveyed in the announcement. When k = all announcements , we sum

over all initial and subsequent announcements; as reported above, the mean value of n(k = all

announcements) j is 4.99. We also sum over only announcements that contain information about bribery ( k = bribery only) , information about bribery and financial misrepresentation ( k = mixed) ,

and information only about misrepresentation ( k = misrepresentation only) .

For the full sample of 115 firms, the mean cumulative abnormal return is -8.98% (median

of -1.49%). Consistent with the evidence presented in Panels A and B, the magnitude of the loss

is significantly larger for enforcement actions that involve financial fraud. For 13 actions with

contemporaneous fraud charges, the mean cumulative abnormal return is -51.58% (median =

-22.22%). For the 102 actions without fraud charges, the mean cumulative abnormal return is

-3.55% (median = -1.15%).

Among the 115 actions in the sample, 90 have at least one announcement that contains

information only about the firm’s bribery. For each of these 90 actions, we calculate

CAR( k ) j = A Re( k ), je( k ) = 1

n( k ) j

!


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CAR(k=bribery only) j and find that the mean value of CAR(k=bribery only) j is -1.46% (median of

-0.52%). In 103 actions, there is at least one announcement that contains co-mingled information

about bribery and financial misrepresentation. The mean value of CAR(k=mixed) j is -1.60%

(median of -0.55%). In 21 actions, there are announcements related to the bribery enforcement

action, but which contain specific information only about the contemporaneous financial

misrepresentation. The mean value of CAR(k=misrepresentation only) j is -35.07% (median of

-8.48%). Similarly significant differences persist when we segregate enforcement actions into

those with and without fraud charges and compare announcements pertaining only to bribery with

announcements pertaining only to financial misrepresentation.

These results indicate that, on average, information that a firm is targeted for a bribery-

related enforcement action triggers a significant reduction in share value. The losses, however,

are more closely related to charges of financial misconduct than to bribery. The losses are

greatest when the bribery violation is contemporaneous with financial fraud charges. Even

among firms that do not face fraud charges, the largest share price losses are associated with

revelations that these firms covered up the bribes by misrepresenting their financial numbers, not

with the bribery per se. Among the subsample of announcements that explicitly mention bribery

violations, the average share price reaction is negative. But even here, the share price losses are

small in magnitude and statistically significant only at the 10% level.

6. Direct costs imposed by bribery enforcement actions

The results in Table 6 indicate that firms facing bribery enforcement actions lose share

value, on average, although most of the losses are associated with charges of financial fraud

and/or misrepresentation. In this section we investigate the extent to which the losses in share

value can be attributed to fines, penalties, investigation, and legal expenses.


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6.a. Fines and penalties

Table 7 summarizes the monetary fines and penalties imposed on the sample firms by the

SEC and DOJ, and via class action lawsuits. These include fines, criminal penalties, and civil

judgments. 17 The mean penalty imposed by regulators is $43.08 million. The mean, however,

reflects several large outliers, including a penalty of $1.657 billion levied against Siemens and

$600.2 million against Halliburton/KBR, both of which had bribery programs that extended over

many years. The median penalty is $3.78 million.

Class action lawsuits were filed in conjunction with 16 of the 115 enforcement actions,

resulting in settlements that total $3,341.87 million. 18 Most of this, however, reflects a large

private settlement of $3,053 million by Tyco International, Inc. for a massive financial fraud, with

which bribery charges were only tangentially related. Note that the mean fine imposed by

regulators is higher in the 102 actions that do not involve financial fraud ($46.00 million versus

$20.16 million), whereas the private lawsuit settlements tend to be larger among the 13 actions

that do involve fraud ($7.13 million versus $545.10 million). Summing monetary penalties from

both regulators and private lawsuits, the unconditional mean is $72.14 million (median of $4.33

million). For the 102 bribery but no-fraud actions, the mean monetary penalty is $46.70 million

and the median is $4.74 million. For the 13 fraud-related actions, the mean is much larger,

$271.75 million, but the median is smaller, $0.53 million.

These results indicate that monetary penalties of some type are imposed in most bribery

actions. In some actions the penalties are large. But for the median enforcement action the direct

legal penalty is small. The bottom rows in Table 6 report that the mean monetary penalty is

0.98% of the firm’s market capitalization, and the median is 0.07%. The monetary penalties are

17 As of December 31, 2011, some enforcement actions may still be ongoing and could lead to additional penalties, such that our numbers understate the amount of the penalties that are eventually meted out forthese actions. Offsetting this concern is the fact that, in our sample, firms tend to settle quickly. So anylingering charges are likely to be directed at individuals rather than the firms in the sample.18 The U.S. Supreme Court has ruled there is no private right of action conferred under any of the

provisions of the FCPA. Therefore, all related class action lawsuits are brought under other securities laws.


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market capitalization, and the median is 1.07%. For one firm – Innospec, Inc. – the ratio of

investigation costs to market capitalization is 13.63%. Removing this outlier, firms incur internal

costs related to its bribery investigation that average 1.15% of the firm’s market capitalization

(median = 1.02% of market capitalization).

Panel B of Table 8 reports the results a simple truncated type I Tobit model of the

determinants of these firms’ investigation costs, using data from these 32 firms. The

investigation cost is negatively related to log(market capitalization) and the length of the violation

period. It is positively related to the fraction of the firm’s sales that are attributable to the bribe

payments, the number of countries involved in the bribery investigation, and the number of

unique charges brought by regulators. Panel C shows that the fitted values of investigation costs

for the 32 reporting firms closely approximate their actual investigation costs.

We use the estimators from the regression in Panel B to predict the investigation costs for

the firms with missing values, and use these fitted values where we do not have direct

observations. As shown in Panel D of Table 8, the mean of the fitted values is 1.13% of market

capitalization, with a median of 0.69%. Whether we use the subset of firms for which we have

direct data, or include estimates from all other firms, the results in Table 8 indicate that, on

average, firms that are targeted for bribery enforcement actions spend in the neighborhood of 1%

of market capitalization on internal investigation and legal expenses.

7. Indirect costs imposed by bribery enforcement actions

7.1. Restatement effect

Table 9 gathers results reported in Tables 6, 7, and 8 to compare of the sources of

shareholder loss associated with bribery enforcement actions. Averaging over all 115 bribery

enforcement actions in the sample, the mean cumulative loss in share value is 8.98%. On

average, firms pay fines and penalties equal to 0.98% of market capitalization, and incur

investigation and legal costs equal to an additional 1.13% of market capitalization. This leaves an


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average 6.87% loss in share value unaccounted for and suggests that firms pay substantial indirect

costs associated with their bribery enforcement actions, in addition to the direct costs reflected in

fines, penalties, and investigation costs.

One indirect cost is that investors re-value the firm in light of information that the firm’s

financial statements previously were incorrect. The revaluation may reflect investors’ judgment

that share prices previously were inflated by false financial information (see Karpoff, Lee, and

Martin, 2008). In bribery actions that do not involve fraud, the financial statement inaccuracies

typically reflect attempts to conceal bribery payments rather than to inflate assets or deflate

liabilities. Yet, share prices may fall simply because investors learn that the firm’s financial

statements are less transparent than previously thought. Some of the events included in our

measure of the cumulative loss in share values are financial restatements. As a crude estimate of

the restatement effect on share values, we subtract the abnormal loss in share values on such

restatement days. Averaging over all 115 firms, the mean share value loss on restatement

announcements that are associated with the misconduct is 1.09%. The median firm has no

restatement events, so the median restatement effect is zero. Among actions without financial

fraud charges, the mean restatement effect is 0.81% of market capitalization, and among actions

with fraud charges, the mean is 3.29%. This shows that bribery enforcement actions that involve

financial fraud charges are associated with more significant financial restatements.

7.2. Reputation loss

Among the arguments for less intense bribery enforcement is the view that firms that are

charged with foreign bribery suffer large reputational losses in the form of decreased sales and

increased costs. 20 Previous research shows that many firms experience reputational losses when

they are discovered to engage in other types of illegal or opportunistic behavior. Indeed, for some

20 Ibid fn. 2. See also Smith et al. (1984), Hines (1995), and Weissmann and Smith (2010).


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types of misconduct, the reputation loss swamps all of the direct costs incurred by the firm, and

represents the most consequential impact on firm value. 21

The results summarized in Table 9 provide evidence on the magnitude of the reputational

loss associated with bribery enforcement actions. For all 115 actions in the sample, the mean

cumulative loss in share value is -8.98%. Fines, penalties, investigation, and legal costs, plus the

restatement effect, together explain 3.20% of that loss. Following Jarrell and Peltzman (1985),

Murphy, Shrieves, and Tibbs (2009), and others, we can interpret the difference, 5.78%, as an

estimate of the average reputational loss experienced by firms facing sanctions for foreign

bribery.

These data, however, are influenced by the subsample of actions in which the bribery

enforcement action is mixed with charges for financial fraud. Excluding actions that include

financial fraud yields a sample that more narrowly represents the impacts of bribery enforcement.

For the sample of 102 actions in which there are no financial fraud charges, the mean cumulative

share loss is 3.55%. We can attribute an average of 0.92% of the 3.55% loss to the fines and

penalties paid by these firms, 1.02% to their investigation and legal costs, and an additional

0.81% to the effects of their corresponding financial restatements. This yields an estimate of the

average reputational loss from the bribery component of these enforcement actions equal to

0.80% of market capitalization.

There are, however, two reasons to regard this 0.80% point estimate to be an

overestimate of the reputational loss attributable to bribery. First, it reflects the influence of a

21 In this literature, a reputation loss refers to the present value of the firm’s loss that accrues when

counterparties change the terms of trade by which they are willing to do business. For example, firm thatsell defective products have lower sales (Karpoff and Lott 1993), and firms that restate earnings havehigher borrowing costs (Graham et al. 2008). Reputation losses are important for false advertising(Peltzman 1981), product recalls (Jarrell and Peltzman 1985), air safety disasters (Mitchell and Maloney1989), environmental violations (Karpoff, Lott and Wehrly, 2005), frauds of private parties (Alexander1999; Murphy, Shrieves, and Tibbs 2009), investigations of IPO underwriters (Beatty, Bunsis, and Hand1998), defense procurement fraud (Karpoff, Lee, and Vendrzyk 1999), financial misrepresentation(Karpoff, Lee and Martin, 2008), venture capital (VC) firms that face lawsuits from business partners(Atanasov, Ivanov and Litvak, 2011), VC firms and the post-IPO performance of their portfolio firms(Krishnan, Ivanov, Masulis and Singh (2012), and repurchase completion rates (Adams Bonaime, 2012).


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skew in the distribution of the cumulative loss in share values. Using medians, the upper bound

estimate of the reputational loss is negative 0.65% of market capitalization, indicating no

reputational loss. Second, it is likely that some of the impacts on share values reflect the impact

of financial misrepresentation, not bribery. That is, many of the announcements used to calculate

the 0.80% point estimate of the reputational loss include information about these firms’ financial

misrepresentation (although not fraud). It is difficult to separate the effects of bribery and

financial misrepresentation in measuring the impact on share values and the direct costs. 22

Among the 13 firms whose bribery charges accompany charges of financial fraud, the

estimate of the reputation loss is very large, with a mean of 44.82% of market capitalization

(median of 18.17%). The t-statistic for the difference between these estimates and those for the

no-fraud sample is significant at the 10% level, and the Wilcoxon test statistic is significant at the

5% level. These results indicate that, even if we accept the 0.80% point estimate in the bribery-

only sample as a measure of the average reputation loss for firms targeted by bribery enforcement

action, firms’ reputational loss for engaging in foreign bribery is extremely small compared to the

reputational loss when the firm also faces charges for financial fraud.

7.3. Determinants of the indirect costs from bribery enforcement actions

Table 10 reports on multivariate tests that shed further light on the nature of the indirect

costs incurred by firms that are targeted by bribery enforcement actions. We report ordinary least

squares estimates with robust estimators from cross-section regressions using data on all 115

firms that were targeted in bribery-related enforcement actions from 1978-2011. In Model 1, the

22 As one approach, we could use the information in Panel C of Table 5 on the cumulative loss in sharevalues on just the announcements of bribery -1.11% for the 82 non-fraud actions), or for mixed bribery andaccounting announcements (-1.26% for the 91 non-fraud actions). But our data on fines and penalties, andinvestigation costs, comingle the effects of both bribery and misrepresentation. For example, theinvestigation costs reflect the costs of examining the internal compliance breakdowns that led to the briberywith the costs of examining the internal financial controls that enabled a cover-up of the bribery. So, wecan estimate of the gross cost to the firm from announcements related solely to bribery (e.g., 1.11% ofmarket capitalization), we cannot allocate the fines and penalties, or the investigation costs, that are due tothe bribery enforcement activities as opposed to the financial misrepresentation.


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dependent variable is the size of all indirect costs, defined as the firm’s cumulative abnormal

return, CAR(k=all events) j, minus its fines, penalties, investigation and legal costs measured as a

fraction of market capitalization. In Model 2, the dependent variable is the reputation loss, which

is the indirect cost minus the abnormal return on days during the enforcement period in which the

firm announced a restatement.

We examine three types of potential determinants of firms’ indirect costs: firm

characteristics, bribe characteristics, and enforcement characteristics. Firm characteristics

include: (i) the natural log of the firm’s market capitalization, measured the day before the initial

public revelation of the misconduct; (ii) Transparency International’s Industry Sector Score of

the targeted firm, with higher values representing industries in which bribery is thought to be rare;

and (iii) Transparency International’s Bribe Payers Index, with higher values representing firms

from countries that are considered relatively free of corruption.

Characteristics of the bribe include: (i) the number of countries involved in the bribery

activities; (ii) the violation period, measured as the number of years the bribery violation

persisted; (iii) the sales influenced by the bribes, as a percent of the firm’s total sales; (iv)

Transparency International’s Corruption Perceptions Index of corruption for the country in which

the bribe occurred, with higher values indicating less corruption; (v) Transparency International’s

Global Corruption Barometer, with lower values indicating less corruption (vi) a dummy variable

set equal to one for the 19 actions in our sample that involve bribery in the United Nations’ oil-

for-food scandal in Iraq, and (vi) the United Nation’s Human Development Index for the country

in which the bribery occurred, with lower values indicating less development. If the bribe

charges involve more than one country we compute the average of the corresponding countries’

CPI, GCB, and HDI values.

Characteristics of the enforcement action include: (i) the number of firm and individual

respondents named in all SEC and DOJ releases related to the bribery action; (ii) an indicator

variable set equal to one if the bribery charges are accompanied by charges of financial


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misrepresentation, (iii) an indicator variable set equal to one if the bribery charges are

accompanied by charges of financial fraud; (iv) an indicator variable set equal to one if the

enforcement action was accompanied by a private class action lawsuit; and (v) the number of

specific violations cited in the enforcement action related to the misconduct, as summarized in

Appendix Table A-1.

The results are reported in Table 10. Indirect costs and the reputation loss both are

positively related to the log of the firm’s market capitalization, indicating that indirect costs tend

to increase with firm size. Total indirect costs are positively related to TI’s Industry Sector Score,

indicating that such costs increase when the bribing firm operates in an industry where bribes are

perceived as relatively rare. The GCB index is the sole bribe characteristic that is significantly

related to indirect costs. The positive relation, significant at the 10% level, suggests that bribes

paid in countries that are perceived to be more corrupt result in larger indirect losses for firms

caught bribing in those countries.

The most significant influence on indirect costs, however, comes from the characteristics

of the enforcement activity. Total indirect costs and the reputation loss both are larger when the

firm faces a class action lawsuit, and when there are more respondents named in the enforcement

agencies’ proceedings. Consistent with the summary statistics in Table 9, indirect costs are

higher when the firm faces a contemporaneous charge for financial fraud. The reputation loss

also is larger when fraud charges are brought, although because of a large standard error, the

estimate has a p-value of .103.

We interpret the results in Table 10 as indicating that, in the cross section of firms, total

indirect costs and reputational losses are relatively insensitive to the characteristics of the bribery.

They are affected more by the nature of the enforcement action. Misconduct that triggers class

action lawsuits, involves many firm employees, and involves financial fraud charges is associated

with relatively large indirect costs and large reputational losses. In separate tests, we find that

each of these variables is positively related to the inclusion of financial misrepresentation


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charges. That is, the total indirect costs and the reputational loss are relatively high when the firm

faces charges for financial misrepresentation. The specific characteristics of the bribery, in

contrast, are not main drivers of the firm’s indirect costs.

8. Discussion and conclusion

The enforcement of U.S. anti-bribery laws is controversial. Critics argue that

enforcement of the FCPA increases the cost of business for U.S. firms, inefficiently decreases

foreign investment, and represents regulatory overreach by the SEC and DOJ. Defenders argue

that aggressive anti-bribery enforcement helps to improve business culture and productivity, not

only for U.S. firms, but also for other firms around the world. At the center of the debate is the

question of how costly anti-bribery enforcement actions are for the firms that are charged with

bribery.

Using data from all 115 publicly traded firms targeted by anti-bribery enforcement

actions from 1978 – 2011, we find that, on the surface, the costs appear to be very large. Direct

costs – including fines, penalties, private lawsuit settlements, investigation expenses, and legal

fees – average 2.11% of market capitalization. The indirect costs are even larger. Using event

study methods, our mean estimate of the indirect costs is 6.87% of market capitalization.

Upon closer inspection, however, most of these costs are due not to these firms’ bribery

charges, but rather, to the charges of financial misrepresentation and fraud that typically

accompany bribery-related enforcement actions. The total direct and indirect costs average

51.58% of market capitalization when the enforcement action includes charges for financial

fraud, compared to 3.55% when there are no such accompanying charges. When we examine the

content of the specific announcements that constitute an enforcement action, most of the share

price losses occur when the announcement contains information about the financial

misrepresentation that accompanies most bribery actions. When the initial announcement about

firm misconduct reports only about bribery, the abnormal loss in share values is small (0.74%)


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and statistically insignificant. When the initial announcement conveys information that the firm

also misrepresented its financial statements, in contrast, the abnormal loss in share values is ten

times as large (7.4%), and is statistically significant.

These results indicate that firms facing sanctions for violating the FCPA’s anti-bribery

rules face substantial costs. But the costs are mostly due to the financial misrepresentation that

typically accompanies bribery, not the bribery per se. Because of the bundled nature of most

bribery and financial misrepresentation charges and penalties, we cannot allocate how much of

the direct costs are due solely to the bribery charges. We can infer, however, that the total

indirect cost of bribery charges – and particularly the reputation loss component – is small or

negligible, on average.

Previous researchers report that the penalties for some types of misconduct are large,

particularly because they include reputation losses. Examples include false advertising (Peltzman

1981), product recalls (Jarrell and Peltzman 1985; Barber and Darrough, 1996), air safety

disasters (Mitchell and Maloney 1989), frauds of private parties (Karpoff and Lott 1993;

Alexander 1999; Murphy, Shrieves, and Tibbs 2009), investigations of IPO underwriters (Beatty,

Bunsis, and Hand 1998), defense procurement fraud (Karpoff, Lee, and Vendrzyk 1999), and

opportunistic behavior by venture capital firms (Atanasov, Ivanov, and Litvak, 2011). The

penalties are large because a firm’s counterparties – its customers, suppliers, investors, and

employees – change the terms with which they are willing to do business when the firm reveals

that its managers have behaved opportunistically in ways that are costly to counterparties. Other

types of misconduct, however, are associated with small reputational losses. These include

environmental violations (Jones and Rubin 2001; Karpoff, Lott, and Wehrly 2005) and frauds of

unrelated parties (Alexander 1999; Murphy, Shrieves, and Tibbs 2009).

Our findings indicate that, in its impact on firm reputation, bribery is more like an

environmental violation and less like consumer fraud. That is, firms do not suffer large


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reputational losses when they are caught bribing. When the bribe is accompanied by financial

misrepresentation, in contrast, the reputational loss tends to be large.

This, in turn, implies that, on average, bribery charges do not by themselves “… lead to

irreparable economic hardship and reputational damage that may adversely affect the overall

stability and competitiveness of any business.” 23 At times, firms that are targeted by bribery

enforcement actions may experience large direct costs, especially in the form of large regulatory

fines and penalties. On average, however, the bribery charges do not harm the firm’s business

relationships with its customers, suppliers, or investors. That is, the firm’s counterparties tend to

care if the firm’s financial statements are misrepresented. But they do not, in general, alter their

willingness to do business with the firm when it is caught bribing.

23 Ibid , fn. 2.


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Table 1. Distribution of bribery-related enforcement actions by industry sector and firm size

Size-based distribution of the publicly traded firms targeted by all 115 enforcement actions for foreign bribery initiated by the SEC and/or DOJ from1978-2011 partitioned across Transparency International’s (TI) industry sectors and size-based deciles. TI’s Sector Score is based on survey responses,and measures the perceived likelihood that firms in the industry pay bribes to obtain or retain business in foreign countries. The Sector Score is scaledfrom 0-10, with higher scores indicating lower perceived likelihood that firms in the industry bribe. For 2011, the average Sector Score is 6.6. Firms inthe sector is the number of active firms in Compustat in each TI-defined sector for fiscal year 2010. Equity size deciles reflect CRSP

NYSE/AMEX/NASDAQ portfolio assignments. Tests of proportionate frequencies between the sized-based deciles and industry sectors are rejectedwith Chi-Squares of 170.84 and 158.68 respectively, both with p-values < .001.

Firms in thesector

Briberyactions

Sized-Based Deciles:

Larger Firms Smaller Firms

SectorSectorScore Number

% ofall

firms Number

% ofall

actions 10 9 8 7 6 5 4 3 – 1Agriculture 7.1 27 0.4% 4 3.5% 1 2 1Light manufacturing 7.1 132 2.2% 0 0.0%Civilian aerospace 7.0 25 0.4% 0 0.0%Information technology 7.0 867 14.2% 8 7.0% 4 1 1 1 1Banking and finance 6.9 1,196 19.5% 2 1.7% 2Forestry 6.9 9 0.1% 0 0.0%

fraud fcpa effect on share prices

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