TY - JOUR

T1 - Financial Penalties and Bank Performance

AU - Köster, Hannes

AU - Pelster, Matthias

PY - 2017/6/1

Y1 - 2017/6/1

N2 - This paper investigates the impact of financial penalties on the profitability and stock performance of banks. Using a unique dataset of 671 financial penalties imposed on 68 international listed banks over the period 2007 to 2014, we find a negative relation between financial penalties and pre-tax profitability but no relation with after-tax profitability. This result is explained by tax savings, as banks are allowed to deduct specific financial penalties from their taxable income. Moreover, our empirical analysis of the stock performance shows a positive relation between financial penalties and buy-and-hold returns, indicating that investors are pleased that cases are closed, that the banks successfully manage the consequences of misconduct, and that the financial penalties imposed are smaller than the accrued economic gains from the banks’ misconduct. This argument is supported by the positive abnormal returns accompanying the announcement of a financial penalty.

AB - This paper investigates the impact of financial penalties on the profitability and stock performance of banks. Using a unique dataset of 671 financial penalties imposed on 68 international listed banks over the period 2007 to 2014, we find a negative relation between financial penalties and pre-tax profitability but no relation with after-tax profitability. This result is explained by tax savings, as banks are allowed to deduct specific financial penalties from their taxable income. Moreover, our empirical analysis of the stock performance shows a positive relation between financial penalties and buy-and-hold returns, indicating that investors are pleased that cases are closed, that the banks successfully manage the consequences of misconduct, and that the financial penalties imposed are smaller than the accrued economic gains from the banks’ misconduct. This argument is supported by the positive abnormal returns accompanying the announcement of a financial penalty.

KW - Management studies

KW - Bank fines

KW - Bank Performance

KW - Bank profibility

KW - Financial penalty

KW - Misconduct

UR - http://www.scopus.com/inward/record.url?scp=85015398364&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2017.02.009

DO - 10.1016/j.jbankfin.2017.02.009

M3 - Journal articles

VL - 79

SP - 57

EP - 73

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

ER -