Do Regulatory Fines Affect the Value of Financial Firms?
There’s all this stuff going on now about environmental, social, governance, ESG they call it. Companies that do good in the world are potentially worth more. Shouldn't a financial company's stock price be representative of that? What could be more good than not committing crimes?
Late into the early morning hours and over several weeks I began researching this idea. I used the website Good Jobs First (link below) for their, frankly, amazing list of violations, Yahoo! Finance to gather the historical stock prices, and a sprinkling of Python, Jupyter notebooks, and pandas software to do me some data science.
I found 1,120 records of fines over $1,000,000 of public companies between January 2010 and July 2022. That’s a total of $201,971,673,913 in cash paid out by banks. That must have really hit the shareholder value. I chose to look at the price of the stock the day before the announcement of the fine and the day after.
I selected the day after because my stock analysis friends tell me that the markets are efficient and information is priced in quickly. A day may even be too long.
I picked the day before as a starting point because no one should have known that a fine was coming, or what the total amount of fine would be. If someone was aware of the details before it was made officially public, that would have been what’s known as "material nonpublic information." Trading on MNPI, as the cool kids call it, is illegal. (For you Compliance geeks, before you correct me, I know it would also be a violation of rules around confidential supervisory information.) So I’m going to have to assume that everyone was playing with their hands above the card table–if they weren’t that probably just makes my analysis even less palatable.
By now you’ve already skipped ahead to the picture, just like I knew you would, but allow me the big reveal, it was a lot of work. Aaaaaaand here it is…..
First, this is a logarithmic graph, meaning the x axis jumps by an order of magnitude at every major tick mark. I did this so you could see more of the dots. A fine of a billion dollars is, per math I’m told, a thousand times larger than a million. In astronomical terms, that’s like the distance between Earth and the Sun versus the hypothesized home of comets, the Oort cloud and the Sun, which is very very very far. Without a log scale, most of the dots would be clustered by the y axis like kittens near a warm fire. Thus, you should not lose sight of the fact that dots above 100 million and 1 billion are vastly larger in terms of cash money.
Second, you may look at this and say, most stocks changed up or down less than 10%, but that’s an artifact of the graphic and dots overlapping. 467 or 42% of the prices changed less than 1% up or down–after a fine of more than $1,000,000, and often, as we said, a lot lot lot more, was announced.
The full statistical breakdown is below, but it’s easy to sum up: nada. Some stocks went up, some went down, on average, nearly zero change in value. This may affect your view of the stock market being rational, or it may influence your view on the impact of regulatory actions on company behavior, or both, I don’t know how jaded you already were.
What do you think? Did you know this? Was this something well known by everyone except me? Would you like me to dive a bit further into some of the data?
Data sourced from:
https://goodjobsfirst.org/
https://finance.yahoo.com/
Post originally made here:
https://www.linkedin.com/pulse/do-regulatory-fines-affect-value-financial-firms-david-silverman/