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Journal of Business Ethics

Erschienen in:

30.07.2015

Stock Market Reaction to Corporate Crime: Evidence from South Korea

verfasst von: Chanhoo Song, Seung Hun Han

Erschienen in: Journal of Business Ethics | Ausgabe 2/2017

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Abstract

This paper examines the impact of corporate crime on the stock market in South Korea. Specifically, we examine the effect of crime type (white-collar vs. street crime, operational vs. financial), industry type (financial vs. industrial), business group affiliation (chaebol-affiliated vs. non-chaebol-affiliated), and corporate governance (strong vs. weak board structure index) on the relationship between corporate crime announcement and stock market reaction. We find negative reactions to stock prices around the announcements of corporate crimes but no significant difference in reactions between announcements of individual and organizational crimes. Individual white-collar crimes have a stronger negative impact on stock prices than do individual street crimes on average, while financial crimes have a significantly greater negative impact than do operational crimes in organizations. Moreover, financial sector firms are impacted more significantly by the announcement of corporate crimes than are non-financial firms. In addition, the stock prices of chaebol-affiliated firms decrease less than do those of non-chaebol-affiliated firms, and those with a higher board committee subindex seem to be influenced less by news of corporate crimes if the size control variable is excluded. Multivariate cross-sectional analyses show consistent findings after controlling for firm-specific factors, crime-type effect, and industry and year effects. The results of this study provide valuable insights because it covers several types of corporate crime, including those committed by individuals and those perpetrated by firms.

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For example, Karpoff and Lott (1993) conceptualized corporate fraud rather broadly, categorizing it into four different types: fraud of stakeholders, fraud of government, financial reporting fraud, and regulatory violations. These four types seem to cover most of the illegal activities that can be perpetrated by individuals and organizations in the corporate world. Barnett (2000) classified white-collar crime into individuals’ misdeeds (e.g., forgery, investment scams, misappropriations, swindles) and organizational crimes (e.g., antitrust violation, ecology law violation, tax law violation). Palmer and Maher (2006) proposed a model of collective corruption that categorized organizational crimes into the crimes of an organization (e.g., price-fixing) and those of employees (e.g., embezzlement schemes). Coleman (1987) also classified white-collar crimes into organizational crimes with support from an organization (e.g., price-fixing, bribing to win contracts) and the occupational crimes of individual criminals (e.g., theft, embezzlement).

Based on three elements common to all frauds (Albrecht et al. 2004), Albrecht et al. (2010) examine the mechanisms of South Korean chaebols’ fraudulent acts and argue that South Korean chaebols have a high propensity to commit fraudulent acts for the following reasons: (1) the opportunities to commit fraud (e.g., family relationships, no checks and balances, weak financial structure, cross-subsidization, and no separation between entities), (2) pressures (e.g., foreign demands, weak financial structure, and family pressures), and (3) rationalization (e.g., too big to fail or state guarantees).

The FN Guide (http://www.fnguide.com) has provided the DataGuide (http://www.dataguide.co.kr) database since 2000. This database is used in Korean studies such as Lee et al. (2009), Cho et al. (2012), Han et al. (2014, 2015.

This regulation is available at http://eng.krx.co.kr/m7/m7_1/m7_1_1/JHPENG07001_01.jsp.

Following Black and Kim (2012), the board structure index is the sum of the board independence and board committee subindices. The definitions of those two subindices are as follows.

Board independence subindex = 10(b1 + b2)/2:
- b1 = 1 if the firm has 50 % outside directors on its board, and zero otherwise;
- b2 = 1 if the firm has more than 50 % outside directors on its board, and zero otherwise.
Board committee subindex = 10(b3 + b4 + b5)/3:
- b3 = 1 if the firm has an outside director nominating committee, and zero otherwise;
- b4 = 1 if the firm has an audit director committee, and zero otherwise;
- b5 = 1 if the firm has a compensation committee, and zero otherwise.

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Titel: Stock Market Reaction to Corporate Crime: Evidence from South Korea
verfasst von: Chanhoo Song
Seung Hun Han
Publikationsdatum: 30.07.2015
Verlag: Springer Netherlands
Erschienen in: Journal of Business Ethics / Ausgabe 2/2017
Print ISSN: 0167-4544
Elektronische ISSN: 1573-0697
DOI: https://doi.org/10.1007/s10551-015-2717-y

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