Dhruv Aggarwal (Northwestern Pritzker School of Law), Corporate Criminal Liability and Firm Value, J.L. Econ. & Org., forthcoming on SSRN. Here is the abstract:
This paper explores the impact of corporate criminal law doctrine on firm value. I study stock market reactions to an Indian Supreme Court decision holding that a corporation’s mens rea (i.e., criminally culpable state of mind) is established when its controller has criminal intent. Companies controlled by individuals and families declined in value in response to this decision, likely because they had human controllers—dominant individuals or families—whose misconduct now left the firms vulnerable to prosecution. This value destruction is concentrated in business group companies, which are tightly controlled by founding families and whose reputation is linked to that of their controller. The effect is smaller for firms that have more foreign institutional ownership, and larger for consumer-facing firms. Firms with individual and family controllers relatively increased legal spending after the decision. Criminal liability’s effect on firm value is thus influenced by the identity of controllers, and institutional investors seem to be better ex-ante monitors of misconduct than consumers.
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