The role of federal law enforcement actions in corporate governance

Large negative stock-price reactions are tied to public announcements regarding informal and formal law enforcement actions taken by the Department of Justice (DOJ), Federal Trade Commission (FTC), and the Securities and Exchange Commission (SEC). Such influences appear especially large for firms with significant reputational capital and growth opportunities. These findings suggest that federal law enforcement plays an important role in monitoring management and represents a powerful corporate governance mechanism. These findings also suggest that public announcements of federal law enforcement actions constitute a flexible tool used to improve suboptimal performance in dynamic competitive environments.