Abstract
In response to perceived corporate governance shortcomings in major U.S. corporations, the U.S. Department of Justice, starting in 2002, substantially increased the execution of non- and deferred prosecution agreements (N/DPAs). This study examines investor responses to three events that define N/DPAs and N/DPA mandated governance improvements, specifically, the official DOJ press release announcing the execution of an N/DPA, the date of the start of the term of the N/DPA, and the date of the end of the term of the N/DPA. Our hand-selected dataset comprises all institutions that executed N/DPAs from 1993 to 2014 (N=301) and are publicly traded (N=94). We document a significant and predictable positive stock price response to the DOJ press release and the start of the N/DPA term. Our tests indicate that the market interprets the three events not in isolation but as sequential and conditional events. We also find that investor's response differs depending on the industry and severity of financial fines and N/DPA mandated governance improvements. We observe no systematic price momentum beyond the three core dates identified in our study, implying that the market is reasonably efficient with respect to information about N/DPAs. Our results are robust to alternative procedures and definitions