In the paper Regulatory Sanctions and Reputational Damage in Financial Markets, recently made publicly available on SSRN, my co-authors (Colin Mayer and Andrea Polo, both at the Said Business School in Oxford) and I study the impact of the announcement of enforcement of financial and securities regulation by the UK’s Financial Services Authority and London Stock Exchange on the market price of penalized firms. A primary function of regulation of financial markets is to uncover and discipline misconduct. In the absence of effective monitoring and enforcement of rules of conduct, financial markets are particularly prone to abuse. The imposition of penalties on firms is an important part of the armoury available to regulators and, following the financial crisis, regulatory authorities have shown a greater willingness to employ them. Our paper reveals that they are only one—and a surprisingly small—component of the overall sanctions available to regulators. We show that reputational sanctions are, for some categories of misconduct, far more potent than direct penalties.

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