The Impact of Anti-Bribery Enforcement Actions on Targeted Firms

Jonathan M. Karpoff
University of Washington
D. Scott Lee
Texas A&M University
Gerald S. Martin
American University

First draft: November 11, 2009

This version: February 27, 2012

We thank participants at seminars at Claremont-McKenna College, the University of Utah, the

NBER Conference on Finance and Ethics, American University, the Securities and Exchange
Commission, and the Oxford Symposium on Corporate Reputation for helpful comments and
suggestions on previous versions of this paper, and gratefully acknowledge financial support from
the University of Washingtons CFO Forum and Global Business Center, and Texas A&M
Universitys Private Enterprise Research Center, and a Shell Foundation Development Research
Grant.

The Impact of Anti-Bribery Enforcement Actions on Target Firms

Abstract
Firms prosecuted for foreign bribery experience significant costs. Their share values
decline by 3.11%, on average, on the first day that news of the bribery enforcement action is
reported, and by 8.98% over all announcements related to the enforcement action. Fines, internal
investigation costs, and losses associated with financial restatements account for 3.20% of the
cumulative loss in share values, suggesting that the remainder, 5.78%, could be attributed to a
reputational impact. Closer inspection, however, indicates that most bribery enforcement actions
are co-mingled with charges of financial misrepresentation and fraud, and that most of these
firms costs are due to the financial violations, not the bribery charges per se. Excluding cases in
which the bribery charges are accompanied by charges of financial fraud, the mean initial loss in
share value drops to -1.60%, and the cumulative loss to -3.55%. Focusing on bribery-related
announcements that are not contaminated by contemporaneous charges for financial
misrepresentation, the magnitude of the initial loss drops further, to -0.47%, and is statistically
insignificant. These results indicate that the financial deterrents to bribery come primarily from
the direct costs imposed by regulators, and not from an impact to the firms reputation with
counterparties.

JEL classification: G38; K22; K42; L51; M41

Keywords: Bribery, FCPA, penalties, financial misrepresentation, fraud

The Impact of Anti-Bribery Enforcement Actions on Target Firms

1. Introduction
The Foreign Corrupt Practices Act of 1977 (FCPA) prohibits U.S. companies from
paying bribes to foreign government officials and politicians for the purpose of obtaining
business or to influence regulation. Only in recent years, however, has the FCPA become a
priority for U.S. law enforcement agencies. Of 115 anti-bribery enforcement actions that target
publicly traded companies in the 34 years since the FCPA was enacted, 57.4% have occurred in
the past five years (20072011).
The recent surge in bribery enforcement has spawned an intense debate over the costs
that anti-bribery sanctions impose on firms. The U.S. Chamber of Commerce argues that the
direct costs are large: Businesses enmeshed in a full-blown FCPA investigation conducted by
the U.S. government have and will continue to spend enormous sums on legal fees, forensic
accounting, and other investigative costs before they are even confronted with a fine or penalty,
which can range into the tens or hundreds of millions.1 The indirect costs may be even
larger: Even a single incident [of bribery] can lead to irreparable economic hardship and
reputational damage that may adversely affect the overall stability and competitiveness of any
business.2 Concern about the costs of bribery enforcement actions motivated attempts to amend
U.S. bribery laws in 2010 and 2011, with new attempts planned for 2012.3
The counterargument is that bribery enforcement actions amount to little more than a slap
on the wrist. Anecdotes suggest that firms suffer small consequences when they are caught
bribing, and that, [T]he puny size of the penalties could provide an incentive for managers to

See www.instituteforlegalreform.com/restoring-balance-proposed-amendments-to-the-foreign-corruptpractices-act.html, page 5 (accessed on February 27, 2012).

2
See PricewaterhouseCooper, Anti-Corruption, www.pwc.com.br/en/forensics/anti-corruption.jhtml
3
See Weismann and Smith (2010). The Searle Civil Justice Institute (2012) summarizes policy disputes
about the FCPA.
1

stretch the rules (Cass 2009).4 The implication of this argument is that bribery-related penalties
are not too large, but rather, too small. Regulators appear to have accepted this argument. In
2008, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) worked
in concert to impose a combined $1.657 billion fine and disgorgement of funds in a bribery
enforcement action against Siemens AG. In 2009, the DOJ and SEC imposed combined fines and
disgorgement of $600.2 million on the Halliburton Company for bribery related charges. In
another highly publicized case, a total of 19 firms settled charges for paying $230 million in
bribes to Iraqi officials in the United Nations Oil for Food program.5 The FBI and Department
of Justice both emphasize that anti-bribery enforcement has become a top public policy priority,
and DOJ officials have opposed attempts to weaken the FCPA (Breuer 2011). Furthermore, the
whistle-blower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010 increase many firms potential liability for bribery violations. A bill introduced in the
112th Congress in 2012, HR-3513, seeks to provide a private right of action for persons and firms
who are damaged by a foreign business that violates the FCPA, thus further increasing some
firms potential liabilities from bribery.
The debate over U.S. anti-bribery enforcement has evolved in the absence of data on the
size and nature of the costs to firms that are targeted by such enforcement. To address this
deficiency, this paper examines all bribery enforcement actions that target publicly traded
companies initiated by the U.S. Department of Justice (DOJ) or Securities Exchange Commission
(SEC) from 1978 through 2011. We document the frequency of such actions, the characteristics
of the target firms, the sizes and locations of the bribes, the value of the benefits sought, and the
costs imposed on target firms. These costs include the fines and penalties imposed by regulators,
the firms direct legal and investigation expenses, and any impacts on the firms reputations.

Cass, Dwight, Cracks in the SECs Crackdown: The Securities Watchdog is Chasing High-Profile Cases,
but the Fines Its Extracting Are Peanuts, August 12, 2009,
http://money.cnn.com/2009/08/12/news/economy/sec_schapiro_fines.fortune/index.htm.
5
See Manipulation of the Oil-For-Food Program by the Iraqi Regime, Independent Inquiry Committee into
the United Nations Oil for Food Program (Paul Volcker, Chairman), New York, NY: IIC, 2005.
2

On the surface, the data seem to support the view that bribery enforcement actions
impose meaningful costs on the targeted firms. Total monetary penalties imposed by the SEC
and DOJ, plus settlements from class action and derivative lawsuits, average 0.98% of the target
firms market value, and the total costs of internal investigations and legal fees consume an
additional 1.13% of market value, on average. Indirect costs, such as lost reputation, appear to be
even larger. The mean one-day share price reaction to the initial revelation of bribery is -3.11%.
Cumulating over all key announcements about the bribery and the related enforcement action, the
mean loss in share values is 8.98%.
Closer inspection, however, reveals that most of these consequences are not due to the
revelation of bribery or bribery-related enforcement activities per se. Rather, most bribery
enforcement activities are accompanied by charges that the company misreported its financial
statements; a small number also are accompanied by charges of financial fraud. We partition the
data along two dimensions to isolate the incremental impact of the bribery charges and
enforcement actions. The results show that most of these firms direct and indirect penalties are
for financial misrepresentation or fraud, not bribery.
First, we partition the sample according to whether the bribery charges are accompanied
by charges of financial fraud. When financial fraud charges are included, the total direct costs
average 3.47% of market capitalization, compared to 1.94% when they are not. More
importantly, indirect costs average 48.11% of market capitalization when fraud charges are
involved, as compared to 1.61% when they are not. In fact, the median estimate of indirect cost is
negative 0.51% for anti-bribery enforcement actions that involve no charges of financial fraud.
Second, we isolate the incremental effects of bribery charges by partitioning each
announcement about the regulatory charges and penalties into disclosures about bribery alone,
financial misrepresentation alone, or a mix of the two. Even firms that do not face charges for
financial fraud typically face charges for financial misrepresentation, if for no other reason than
to cover up the bribe payments. When the initial revelation of bribery-related misconduct
3

discloses both bribery and financial misrepresentation, the one-day abnormal stock return is
-1.85%. When the announcement discloses only financial misrepresentation (that subsequently is
related to bribery activity), the one-day abnormal return is -9.92%. But when the initial
announcement discloses only bribery, with no mention of financial misrepresentation, the oneday abnormal stock return is -0.47% and is not statistically significant. Cumulating these
partitioned abnormal stock returns for each enforcement action, we find that misrepresentation
announcements are associated with a mean cumulative abnormal return of -5.34%, compared to a
mean of -0.60% for bribery-only announcements and -0.75% for the mixed bribery-andmisrepresentation announcements.
These results indicate that, while the direct and indirect costs associated with bribery
enforcement actions are significant, most of these costs are attributable to financial misconduct,
not bribery. Most notably, when the bribery is accompanied by charges of financial fraud, the
direct and indirect penalties are large. This, in turn, implies that firms face large penalties for
misleading investors, not for bribery per se.
This paper proceeds as follows. Section 2 provides a brief history and description of the
Foreign Corrupt Practices Act of 1977 and related research. Section 3 describes the data used in
our analysis. Section 4 reports descriptive statistics on the characteristics of firms that are
targeted for bribery enforcement, the location and sizes of the bribes paid, and the benefits sought
by the bribing firms. Section 5 reports on the share value effects of announcements that reveal
the initiation of enforcement activities and the subsequent penalties imposed on targeted firms.
Section 6 reports on the direct costs incurred by targeted firms, including fines, penalties, lawsuit
settlements, investigation expenses, and legal expenses. Section 7 examines the indirect costs,
including the effects of financial restatements and the reputational costs borne by the targeted
firms. Section 8 concludes with a discussion of the implications of these findings.

2. The Foreign Corrupt Practices Act of 1977

In 1975, the International Chamber of Commerce (ICC) established the Shawcross
committee to recommend steps to combat corporate extortion and bribery. The following year,
the former Prime Minister of Japan was charged with and subsequently imprisoned for taking $2
million in bribes for assisting Lockheed Corporation in selling 21 jets to a Japanese airline.
Subsequent revelations indicated that many U.S. firms were bribing foreign officials to obtain
business and misrepresenting their financial statements to avoid detection by auditors and
investors. Contemporaneously, congressional investigations into the Watergate scandal revealed
that many corporations maintained slush funds to court favor from both domestic and foreign
government officials. In response, the SEC proposed an amnesty period to encourage firms to
conduct independent internal investigations and voluntarily disclose questionable payments.
More than 500 firms, including 100 firms in the Fortune 500, subsequently disclosed illicit
payments that exceeded $300 million.
Subsequently, Congress passed the Foreign Corrupt Practices Act of 1977 (FCPA). As
amended by the Act, 15 U.S.C. 78dd (30A in the Securities Exchange Act of 1934) prohibits
any issuer, domestic concern, or other persons from obtaining anything of value by corruptly
making payments. Before 1977, federal powers to prosecute foreign bribery relied primarily on
anti-fraud and money laundering provisions of the Currency and Foreign Transactions Reporting
Act and the Travel Act. Enforcing these statutes proved difficult because they required proof of
intent (scienter), racketeering, or failure to report foreign currency transactions. With the FCPA,
the SEC and DOJ now could impose civil and criminal penalties for bribery in and of itself.
Pre-FCPA investigations revealed that many firms maintained secret accounts to facilitate
their bribe payments. To aid in the prosecution of its anti-bribery rules, the FCPA also added
three financial reporting provisions: (i) 15 U.S.C. 78m(b)(2)(A), which requires firms to keep
and maintain books and records that accurately reflect all transactions; (ii) 15 U.S.C.
78m(b)(2)(B), which requires firms to devise and maintain a system of internal accounting
5

controls; and (iii) 15 U.S.C. 78m(b)(5), in which no person shall knowingly circumvent or
knowingly fail to implement a system of internal accounting controls or knowingly falsify any
book, record, or account.6 As reported below, most enforcement actions for bribery also invoke
charges of financial misrepresentation. Our tests exploit this fact to isolate the impact of bribery
charges on the targeted firms.
The FCPA is the topic of extensive discussion in the legal literature (e.g., see Cohan,
Holland and Wolf, 2008; Davis, 2002; Dugan and Lechtman, 1997; Erbstoesser, Struck and
Chesley, 2007; Huskins, 2007; and Timmeny, 1982). Researchers also have examined the
general influence of corruption and trust on economic performance (e.g., see Shleifer and Vishny
1993, 1994; Guiso, Sapienza, and Zingales 2009) and whether bribery is inherently wrong
(Green, 2005). But there is very little empirical research on the FCPA and the effects of antibribery enforcement activity. Hines (1995) reports that the FCPA decreased U.S. firms
operations in foreign countries, although Graham (1984) reports no effect on U.S. firms market
shares. Cheung, Rau and Stouraitis (2011) examine the characteristics of bribes and bribe-payers
using a sample that includes 41 U.S. firms. They find that prior to paying bribes, firms tend to be
poor performers compared to their peers that do not pay bribes. Smith, Stettler, and Beedles
(1984) examine share price reactions to announcements by 98 firms that voluntarily reported
payments to foreign government officials during the SECs pre-FCPA amnesty program that
ended in 1978. The mean share price reaction is negative, and Smith et al. conjecture that this
reflects investors expectations of future government sanctions or the loss of future business.
This conjecture anticipates the current policy debate over the sizes of the direct and indirect
penalties for firms that are targeted in FCPA-related anti-bribery enforcement actions.

Two additional rules were added by the SEC to the Code of Federal Regulations to aid in enforcement of
these provisions for entities that have a security registered pursuant to Section 12 of the Securities Act:
13b2-1 (17 CFR 240 13b2-1) and 13b2-2 (17 CFR 240 13b2-2). Maher (1981) and Shearing and Sterling
(2012) provide detailed descriptions of the 1977 law that introduced these provisions.
6

3. Data
Our sample consists of all enforcement actions initiated by the SEC and DOJ from
January 1, 1978 through December 31, 2011 for foreign bribery under the Foreign Corrupt
Practices Act of 1977. Most (95%) of the enforcement actions in our sample incorporate other
charges, including aiding and abetting, conspiracy, civil and criminal fraud, racketeering, and tax
evasion. We document all such charges, and also track all related class action and derivative
lawsuits associated with each enforcement action. Table A-1 in the Appendix reports these data
in detail.
To identify the enforcement actions, we searched for specific references to the bribery
provisions of the FCPA (e.g. sections 78dd-1 through 78dd-3 and 30A) using the Lexis-Nexis
FEDSEC:SECREL library and the PACER database.7 To assure that we did not miss any bribery
enforcement actions that used other provisions of the U.S. code without including bribery charges
explicitly, we also searched for the terms bribery, Foreign Corrupt Practices Act, and
FCPA, and read all resulting SEC and DOJ proceedings to determine if a violation included
illegal payments to foreign officials. Since September 19, 1995, the SEC has posted selected
enforcement releases at www.sec.gov. The Department of Justice provided us additional
enforcement data for the civil and criminal enforcement proceedings for which the DOJ was
involved. Finally, we used EDGAR, PACER, Dow Jones Factiva, and Lexis-Nexis Legal
Research and General News categories to gather additional information and news releases
pertaining to the enforcement actions, including related class action and derivative lawsuits.

The Lexis-Nexis FEDSEC:SECREL library contains public releases from all SEC securities enforcement
actions, and the PACER Service Center (pacer.psc.uscourts.gov) contains federal court documents.
7

4. Descriptive statistics on bribery enforcement, bribe payments, and bribe payers

4.1. The time trend of enforcement actions
The DOJ and SEC initiated a total of 175 bribery-related enforcement actions from
January 1978 through December 2011. Of these, 53 target private entities, including individuals,
foreign firms with no securities traded on US exchanges, and one foreign affiliate of a private US
accounting firm.8 Five actions involve publicly traded firms that lack CRSP and Compustat
coverage, and two additional actions involving recidivist firms (Baker Hughes, Inc. and ABB
Ltd) were excluded to avoid having each firms second violation period overlapping the
enforcement period for its first offense. The remaining 115 enforcement actions involve bribery
by agents working for publicly traded companies, and constitute the sample used in this study.
Figure 1 shows the chronological distribution of these enforcement actions. From 1978 through
2006, the median number of actions per year is one. Enforcement activity increased sharply in
2007, peaking with 19 actions initiated in 2010. Of the 82 actions initiated since 2004, 19 involve
the United Nations Oil-for-Food bribery scandal in Iraq.

4.2. Characteristics of bribing firms

Table 1 partitions the 115 sample firms across industries and firm size deciles. We use
SIC codes to group firms according to the industry definitions used by Transparency International
(TI), and list the industries in declining order of TIs Sector Score. The Sector Score is an index
that reflects survey respondents view of the frequency with which firms in the industry pay
bribes. It is scaled from 0 to 10, with lower numbers associated with industries where bribe
paying is common practice. According to the Sector Score, perceived bribery is least common in
the Agriculture industry and most common in Public works contracts and construction.

The 53 actions include the highly publicized action against U.S. Representative William J. Jefferson (DLA). Jefferson was convicted of using his office to solicit bribes to promote telecommunications deals in
Nigeria, Ghana and elsewhere; oil concessions in Equatorial Guinea; satellite transmission contracts in
Botswana, Equatorial Guinea and the Republic of Congo; and development of different plants and facilities
in Nigeria.
8

The industries with the most frequent bribery enforcement actions are Heavy
Manufacturing (46 actions), Oil and Gas (19), and Pharmaceutical and Healthcare (13). As
shown in the table, however, this frequent incidence reflects the large number of publicly traded
firms in these industries. TIs Heavy Manufacturing industry accounts for 40.0% of the 115
bribery-related enforcement actions, but this industry includes 16.9% of all CRSP-listed firms.
As a fraction of the number of firms in the industry, the industry with the highest number of
bribery-related enforcement actions is Arms, Defense, and Military (27.6% of firms). Although
TIs Sector Score ranks Agriculture as the industry whose firms are least likely to bribe, a total of
14.8% of firms in this industry have been targeted by anti-bribery enforcement actions. Chisquare tests of proportionate frequencies reject the hypotheses that the sample is distributed
equally across industries, either in terms of total actions or the fraction of firms in the industry
targeted for enforcement (p < 0.001 in both tests).
Table 1 describes two additional characteristics of the firms targeted for bribery
enforcement actions. First, targeted firms tend to have high equity value. More than half (59) of
the targeted firms reside in the largest decile of CRSP-listed firms, and none are in the smallest
three deciles. A Chi-square test of proportionate frequencies rejects the hypothesis that the
sample is distributed equally across size deciles (p < 0.001). Second, there is no significant
relation between the incidence of bribery enforcement actions and TIs Sector Score. Indeed, the
correlation is positive 0.059, indicating a slight (statistically insignificant) tendency for bribery
actions to target firms in industries that should experience relatively little bribery, according to
TIs ranking. This suggests either that the respondents to TIs Sector Score are misinformed or
that targets of bribery enforcements are selected for reasons other than the industry-based
frequency of bribes.
Table 2 reports on the home countries of the bribing firms. The FCPA is a U.S. law, but
the enforcement agencies have jurisdiction over all firms that issue securities or have business
operations in the United States. So, although most (87) of the targeted companies are
9

incorporated in the United States, the sample includes 21 foreign firms with ADRs traded in U.S.
markets, and seven foreign firms with equity listed on U.S. exchanges. Most of the foreign firms
(82%) have been targeted for enforcement action since 2005.
Table 2 also reports TIs Bribe Payers Index (BPI) for each country that was home to a
firm charged with bribery. The BPI is based on a survey of business executives, and ranks 28
countries with the worlds largest economies by the likelihood that companies from these
countries will pay bribes in other countries. A low BPI indicates a country where bribe paying is
commonplace (Russia has the lowest BPI of 6.1). A high BPI indicates countries whose
companies are less likely to pay bribes. (The Netherlands, Sweden and Switzerland share the
highest BPI of 8.8. The BPI for the United States is 8.3.) Although the largest FCPA-related fine
was imposed on a German company (Siemens), the BPI for Germany is relatively high (8.6).9
Table 3 reports two logistic regressions that examine the characteristics of bribing firms.
The data consist of a yearly panel from 1978 through 2011 using data on all Compustat-listed
firms. In Model 1, the (untransformed) dependent variable equals one for a firm targeted for a
bribery violation in the year the enforcement action was initiated. In Model 2, the dependent
variable equals one for the targeted firm in every year that the firm was accused of paying bribes.
So, Model 1 measures the characteristics of firms accused of bribery in the year they are accused,
whereas Model 2 measures the characteristics of these same firms during the years in which they
engaged in bribery. The right-hand side variables measure each firms size, profitability,
leverage, asset characteristics, and reliance on foreign sales. We also include dummy variables
for the firms industry, year, and the presence of a top quality auditor. The results in Table 3
indicate that the probability that a bribe will be revealed (Model 1), or is ongoing (Model 2), is

Seven firms accused of bribery are domiciled in countries not represented in TIs BPI. For these we
employ BPI scores from countries we judged as regionally and culturally similar to the missing country as
BPI proxies. We use Swedens BPI for Norway. For Panama and Bermuda, we average the BPIs of the
United States, Brazil, Argentina and Mexico. For Denmark, we average the BPIs of Germany, Netherlands
and Sweden. For Hungary, we averaged the BPIs of Germany, Italy and Russia, and for Luxembourg, we
averaged the BPIs of Belgium, France and Germany. These are undeniably arbitrary judgments, but they
only affect seven (6.1%) of the 115 sample observations.
10

positively related to firm size, leverage, and the fraction of sales made in foreign countries. Both
probabilities are negatively related to the firms market to book ratio, and the probability that a
bribe is revealed is negatively related to the firms current ratio. Overall, the data indicate that
the firms apprehended for foreign bribery tend to be large manufacturing firms that rely heavily
on sales in foreign countries, are heavily leveraged, have low cash holdings, and have low market
to book ratios. Examples of such companies, which appear in our sample, include Lucent
Technologies Inc., Ingersoll-Rand Co., Ltd., Textron Inc., and The Dow Chemical Co.10

4.3. Where do bribes occur?

Table 4 reports on the countries where bribes were paid. The country with the most
bribery enforcement actions is Iraq (24 times), followed by Nigeria (23), China (21), Indonesia
(13), and Saudi Arabia (10). The total across countries exceeds the total enforcement actions
(115) because many actions involve charges of bribery in more than one country. As an example,
Dimon, Inc. (now known as Alliance One International, Inc.) paid more than $3 million in bribes
to Kyrgyzstan government officials to purchase Kyrgyz tobacco for resale to Dimon's customers,
and also paid bribes of more than $1.2 million to government officials of the Thailand Tobacco
Monopoly to obtain more than $18.3 million in sales contracts.11
Table 4 also reports three measures of the tendency for bribes to occur in a country. The
first is Transparency Internationals 2010 Corruption Perceptions Index (CPI) and its
corresponding rank for each country. For example, Nigerias CPI of 2.4 ranks it 143th in
perceived corruption. At the opposite end of the CPI spectrum, Singapores CPI of 9.2 ranks it as

10

Consistent with Model 2, Cheung, Rau and Stouraitis (2011) also find that firms engaged in bribery tend
to be larger and more levered than their peers. Unlike our results, however, Cheung et al. find that firms
engaged in bribery have relatively high market to book ratios. This difference may reflect sample
differences. For example, our sample consists mostly of firms domiciled firms in the U.S. (75.7%),
whereas the Cheung, et al. (2011) sample includes only 38.3% U.S. domiciled firms.
11
Cheung, et. al. (2011) differ somewhat on this dimension also. In their sample, Japanese entities receive
over a quarter (27) of the bribes in their sample, whereas our sample includes only one bribe recipient in
Japan. Our samples leading country for briberies (24 actions) is Iraq, which appears only once in the
sample of Cheung, et. al. (2011). On the other hand, Nigeria, China and Indonesia appear frequently in
both samples.
11

the least corrupt country where bribes occurred (according to the business executives and analysts
surveyed by TI). The second measure reported in Table 4 is TIs Global Corruption Barometer
(GCB), which is based on surveys of the general public, and the third is the United Nations
Human Development Index (HDI). Both the GCB and HDI are scaled from 0 to 1. A value of 1
on the GCB scale indicates the worst (perceived) corruption. A value of 1 on the HDI indicates
the highest level of development based on three dimensions: life expectancy, adult literacy, and
standard of living.
Table 4 shows that bribe payments associated with FCPA-related enforcement actions
tend to occur in countries with a reputation for corruption and poor development. The mean CPI
for all countries named in bribery enforcement actions is 3.6, which corresponds to the bottom
tercile (i.e., most corrupt) of countries when ranked by their CPI measures. The mean GCB for
countries named in bribery enforcement actions is 0.340, which corresponds to the top tercile
(most corrupt) of countries when ranked by their GCB measures. The mean HDI is 0.667, which
corresponds to the bottom tercile (least developed) of countries ranked by the HDI.

4.4. Amounts paid and benefits received

One of the necessary requirements for a payment to be considered a bribe is that it must
be paid with the purpose of receiving something of value. Table 5, Panel A, indicates that bribepaying firms intended to stimulate sales in 95 (82.6%) of the 115 actions, to secure political or
regulatory favors in 23 (20.0%) actions, and to reduce taxes in five (4.2%) actions. Because eight
firms had multiple purposes for their bribes, the sum of these percentages exceeds 100%. In the
Dimon, Inc. case cited above, for example, the firm made improper payments to Kyrgyzstan
government officials both to procure tobacco and also to decrease its tax liability. An example of
pure tax avoidance occurred in 2001, when Baker Hughes paid an Indonesian official $75,000 for
the purpose of reducing a $3.2 million tax assessment against PT Eastman Christiensen, an
Indonesian corporation controlled by Baker Hughes.
12

Panel B of Table 5 reports on the bribe payment amounts, the amount of business the
bribes were intended to garner for the firm, and the net gains that the bribing firm expected to
receive. The data come from narratives in the SEC and DOJ enforcement releases. The mean
bribe stretched over 5.09 years (median of 4.0 years) and paid $26.85 million (median of $1.0
million). At the extreme, Siemens AG paid $1.79 billion in bribes in ten countries over a 24.75year period, and Montedison SpA and Halliburton each paid bribes exceeding $100 million.
Panel B also provides information about the sales that most bribes were intended to
garner, and the net benefits to the bribing firms. Our information comes from the SEC and DOJ,
which must calculate the bribe-related gains to determine the firms penalties.12 Buckberg and
Dunbar (2008) state that the SEC and DOJ calculations emerge from a process that begins with
the SEC or DOJ providing a reasonable approximation of the defendants illegal sales and
profit, at which time the burden of rebuttal falls on the defendant to demonstrate whether the
SECs calculation exceeds sales and profits that are related to the misconduct. The process for
determining the bribe-related benefits has stimulated considerable legal debate, but they provide
the most objective estimate of expected benefits available. It is noteworthy that since the early
1990s, the SEC and courts have relied on event studies and other methods familiar to financial
economists to estimate the pecuniary gains and amounts to be disgorged (Mitchell and Netter,
1994).
For 97 of the 115 enforcement actions in our sample, information about the firms net
gains is available from SEC and/or DOJ releases. (In 54 actions, the information comes from the
disgorgement paid by the firm, and in 42 actions, the net gain is reported verbatim.) In 17
additional actions, SEC and/or DOJ releases report on the incremental sales the firm earned, or
expected to earn, from the bribe. And in one action involving American Totalisator Co., the

12

The penalties include fines and disgorgement plus pre-judgment interest of ill-gotten gains. The
calculation of the bribe-related benefits are guided by the U.S. Federal Sentencing Guidelines, which state
that, Pecuniary gain means the additional before-tax profit to the defendant resulting from the
relevant conduct of the offense. Gain can result from either additional revenue or cost savings (See
www.ussc.gov/Guidelines/2011_Guidelines/Manual_HTML/Chapter_8.htm, accessed February 27, 2012.)
13

value of the ill-gotten contract was collected from a newswire announcement issued when the
contract was awarded. For these 18 actions in which we do not have SEC or DOJ calculations of
the size of the net benefit, we estimate the net benefit by multiplying each firms bribery-related
sales by its profit margin (from Compustat) during the years the bribery payments were made.
For the 95 briberies intended to garner sales, the expected sales increase averaged
$1,017.93 million (median = $36.56 million). On average, the ratio of the bribe to the sales
influenced is 5.71% (median is 3.30%). Expressed differently, the average bribing firm paid
$5.71 to generate $100 of additional expected revenue, or $3.30 if we focus on the median. In the
extreme, one bribing firm paid $40 to generate $100 of additional expected revenue.
On average, the fraction of the mean expected bribe-generated sales to the firms total
sales across the entire violation period is 4.97% (median = 0.36%). (In the extreme, one firm
expected to generate two dollars of additional sales for every dollar of current sales.) These
numbers indicate that typical bribe payments affected a small, but meaningful fraction of these
firms business activities.
The mean expected pecuniary gain (sales net of expenses including the bribe) is $30.66
million, and the median is $2.56 million. The bottom row of Panel B reports a mean ratio of the
expected pecuniary gain to the bribe of 1.35. Thus, for every $1 expended on bribes, the mean
expected before-tax benefit was $1.35 and the median was $2.46. At one extreme, ERHC
Energy, Inc. paid a bribe of $100,000 to obtain sales from 2004 2007 that were expected to
generate $20.48 million in profits, a benefit-to-bribe ratio of 204.80. At the other extreme, in
1993 Litton Industries paid a $16.3 million bribe to obtain a $197 million contract that the
Department of Justice estimated generated a profit of $2.1 million, a benefit-to-bribe ratio of only
0.13.
These estimates imply that bribe recipients tend to extract a large fraction of the gains
that the bribes are intended to garner. Indeed, the Litton Industries example seems perverse, as it
is not clear why a firm would pay more in bribes than the affected business is worth. We
14

conjecture that these estimates are affected by measurement error and/or agency problems in the
bribe paying firms. Measurement errors can arise if SEC and DOJ officials generate conservative
estimates of net gain to avoid costly fights over the penalties to be imposed upon the target firm.
Agency problems can arise if the firms managers extract some of the gain from the bribe-related
business activity. In some cases, for example, the bribe-paying manager and bribe-receiving
government official might both benefit at the expense of the bribe-paying firms shareholders.13

5. The impacts of bribery enforcement activity on share values

5.1. Initial revelation of misconduct
We are interested in measuring the extent to which bribery enforcement actions impose
costs on the targeted firms, and the nature of those costs. As a first step, we measure the share
value effects that occur when investors learn that a firm is the subject of an enforcement action
for foreign bribery. Abnormal returns are calculated by subtracting the CRSP value-weighted
index of all stocks from the raw return of the firms equity. Parametric t-statistics for the mean
abnormal returns are calculated from the cross-section standard error of abnormal returns. We
also report median abnormal returns and significance levels using the Mann-Whitney test.
Bribery-related enforcement actions usually involve a complex sequence of news reports,
lawsuits, enforcement activities, and penalties that relate to the targeted firms misconduct. The
average action in our sample has 4.99 such announcements that contain new information about
the bribe and the corresponding penalties. That is, in addition to the initial revelation about the
bribe, there is an average of 3.99 additional announcements about the nature of the bribery and

13

Although agency issues can affect managers incentives to pay bribes, we do not pursue this line of
inquiry in this paper. Rather, we seek to measure the consequences of bribery enforcement activity for firm
value. Cheung, Rau and Stouraitis (2011) estimate an average benefit to bribe ratio of between 10.18 and
11.46. Their estimation procedure and sample, however, differs substantially from ours. Cheung, Rau and
Stouraitis (2011) use an event study to estimate the benefit to the bribe paying firm, and use a sample
drawn from several countries that ends in 2007. We use SEC and DOJ estimates of the benefits to the bribe
paying firm, using all enforcement actions initiated by U.S. enforcement agencies through 2011; 44.7% of
our sample occurs after 2007.
15

the penalties imposed by the SEC and DOJ. In identifying the additional announcements, we
ignore multiple news stories that convey information that previously was made public in prior
press releases or SEC and DOJ proceedings.
Panel A of Table 6 reports the average one-day market-adjusted return for the initial
revelation of each bribery enforcement action. Averaging over all 115 firms, the mean one-day
abnormal return is -3.11% and the median is -0.26%, with both the t-statistic and Wilcoxon zstatistic significant at the 1% level. Thus, on average, the initial announcement of misconduct
that involves bribery is associated with a significant decrease in the firms share values.
In most actions, the SEC and/or DOJ bring charges for other violations in addition to the
charges of bribery. Appendix Table A-1 reports on the full range of these related charges. The
most important related charges, in terms of their valuation effects, relate to financial misconduct.
In 13 of the 115 enforcement actions, the bribery charges were accompanied by charges of
financial fraud. The mean one-day abnormal return upon the initial revelation of bribery charges
for these 13 firms is -14.91% (median = -3.33%). For the remaining 102 firms, the mean one-day
abnormal return is -1.60% (median = -0.15%). The difference in these average one-day returns is
statistically significant. Hence, the average abnormal return for firms that face contemporaneous
fraud charges is much larger in magnitude than it is for firms that do not face fraud charges. This
indicates that one of the driving forces behind the negative abnormal returns associated with
bribery enforcement actions is the contemporaneous revelation of financial fraud.
A further distinction is that the information reported in the initial announcement of firm
misconduct varies in a systematic way across firms. Almost all bribery actions include charges
for financial misrepresentation, as the bribing firms must manage their financial reports to hide
the bribe payments. In 74 actions, the initial announcement revealing that the firm engaged in
illegal bribery focused only on the bribery; information about financial misrepresentation comes
later. For example, on August 7, 2009, the 10-Q of Watts Water Technologies, Inc. reported that:

16

We have received information regarding possible improper payments to foreign

government officials by employees of Watts Valve (Changsha) Co., Ltd., an indirect
wholly owned subsidiary of the Company in China. Such payments may violate the
Foreign Corrupt Practices Act. We are conducting an investigation utilizing outside
counsel and voluntarily disclosed this matter to the United States Department of Justice
and the Securities and Exchange Commission. We cannot predict the outcome of this
matter at this time or whether it will have a materially adverse impact on our financial
condition or results of operations.14
In 28 actions, the initial revelation of the firms bribery also contains information about the firms
financial misrepresentation. For example, on March 13, 2006, a newswire release reported:
Pride International, Inc. (NYSE: PDE) announced today that it will delay the filing of its
2005 annual report on Form 10-K until after its due date on March 16, 2006. The
Company has received allegations relating to improper payments to foreign government
officials beginning a number of years ago in connection with certain of its overseas
operations, as well as corresponding accounting entries and internal control issues. The
Audit Committee of the Board of Directors is overseeing an investigation by outside
counsel of such allegations. At this time, the Company does not know whether the
allegations will be substantiated, and if so, who may be implicated or what impact the
allegations or the investigation may have on the Company, the Company's business or the
Company's financial statements.15
In the 13 remaining actions, the initial announcement of misconduct focuses only on the financial
misrepresentation and does not explicitly mention bribery. For example, on February 9, 2006,
UTStarcoms 8-K stated that:
At the request of the UTStarcom management team, the Audit Committee of the Board of
Directors of the Company has initiated an investigation by independent counsel with
regard to the circumstances surrounding the premature recognition of revenue on a
contract with a customer in India, and other related issues. The Company recognized
approximately $22 million in revenue on the contract, with total gross margin of less than
one million dollars. This revenue was recognized during several of the quarters from
2003 through 2005. At the conclusion of this investigation, the Audit Committee will
assess the findings, and will evaluate the materiality of any adjustments to determine if
previously issued financial statements need to be adjusted.16
When we partition the 115 initial announcements according to content (Panel A of Table
6), the market reactions suggest that investors are more concerned about financial

14

www.sec.gov/Archives/edgar/data/795403/000110465909048049/a09-18466_110q.htm (page 34).

"Pride International Delays Filing of Form 10-K and Reschedules Earnings Release Date." PR Newswire,
Mar 13, 2006. http://libezproxy.tamu.edu:2048/login?url=http://search.proquest.com/docview/451209920?accountid=7082.
16
UTStarcom Releases Preliminary Fourth Quarter 2005 Financial Results." PR Newswire, Feb 09, 2006.
http://libezproxy.tamu.edu:2048/login?url=http://search.proquest.com/docview/451258273?accountid=7082.
15

17

misrepresentation than they are about bribery. For the 74 initial announcements that disclose
bribery only (e.g., Watts Water Technologies, Inc.) the median market-adjusted return is -0.74%
(median of -0.03%), and is statistically insignificant. In contrast, the 28 initial announcements
that disclose both bribery and financial misrepresentation (e.g., Pride International, Inc.) result in
an average abnormal return of -2.83% (median of -1.13%), and the 13 initial announcements that
disclose only the financial misrepresentation (e.g., UTStarcom) result in an average abnormal
return of -17.19% (median of -8.48%). The abnormal returns associated with each successive
group are significantly worse than those of the preceding group, consistent with the conjecture
that the shareholder losses associated with these revelations are driven by investor concerns over
financial misrepresentation, and not by concerns over bribery.
Partitioning each of the subgroups of initial announcements into those that were or were
not associated with financial fraud leads to similar inferences about what drives the market losses
associated with bribery revelations. Of the 74 initial announcements that mention bribery only,
71 actions involve no financial fraud. The mean one-day abnormal return for these 71 actions is
-0.47% (median of -0.02%), which is in contrast to a mean abnormal return of -7.01% (median of
-0.55%) for the three remaining fraud-tainted actions. Of the 28 initial announcements with
commingled bribery and misrepresentation revelations, 22 involved no financial fraud and have a
mean one-day abnormal return of -1.85% (median of -0.43%). This is in contrast to the
significantly larger mean abnormal loss of -6.45% (median of -2.91%) for the 6 remaining actions
that involve fraud. Finally, of the 13 initial announcements that mentioned misrepresentation
only, 9 actions involving no fraud have a mean abnormal return of -9.92% (median of -3.43%).
For the 4 actions in this subgroup that had fraud charges, the mean abnormal return is -33.53%
(median of -31.96%).
The results in Panel A of Table 5 indicate that, on average, the initial revelation of
misconduct that leads to enforcement activity for bribery is associated with a significant decrease
in the target firms share value. The decrease, however, is concentrated among firms that are
18

prosecuted for financial fraud, and among announcements that contain information about
financial misrepresentation. Initial revelation announcements that are solely about bribery are
associated with statistically insignificant initial share price reactions.

5.2. Subsequent announcements

In addition to the initial announcement of misconduct, subsequent announcements reveal
important information about the nature of the bribery, the financial misrepresentation and/or fraud
in which the firm engaged to cover up the bribery, and the penalties imposed on the targeted firm.
In total, there are 459 such subsequent announcements related to the 115 bribery enforcement
actions, an average of 3.99 per action. Panel B of Table 5 summarizes the effects of these
announcements on share values.
Averaging over all 459 subsequent announcements, the mean one-day abnormal return is
-1.47%, with a median of -0.55%. Thus, the subsequent announcements contain important
information that, on average, is associated with decreases in share values. Once again, the size of
the abnormal return depends on the presence of contemporaneous fraud charges and the specific
content of the announcement. For the 309 follow-up announcements associated with the 102
actions that did not involve financial fraud, the mean one-day abnormal return is -0.64% (median
of -0.32%), compared to -3.18% (median of -1.12%) for 150 follow-up announcements associated
with the 13 actions that involve financial fraud.
Among 309 follow-up announcements for 102 actions that involve no fraud charges, 125
announcements mention only bribery and 19 announcements mention only financial misconduct.
The mean one-day abnormal return for news of bribery alone is -0.46% (median of -0.23%), as
compared to a significantly larger mean of -3.50% (median of -1.30%) for news about financial
misrepresentation. A similar pattern exists for subsequent announcements for actions involving
financial fraud. Here, 19 announcements mention only bribery and have a mean abnormal return
of -1.02% (median -0.43%); 106 announcements contain information about financial misconduct,
19

and have a mean abnormal return of -4.21% (median of -1.51%). These results indicate that both
initial and follow-up announcements about firms violating the anti-bribery law lead to decreases
in share values. However, most of the losses in share value occur in response to announcements
about the firms financial misrepresentation and/or fraud, not to revelations of bribery.

5.3. Cumulative abnormal returns

Panel C reports on the abnormal returns cumulated over all informational events available
for each action in the sample. The cumulative abnormal return for firm j is
n( k )j

CAR( k )j =

A Re( k ), j

e( k )=1

CAR(k)j is the sum of the one-day abnormal returns, ARe(k),j, summed over the n(k)j unique events
that convey information about firm js bribery and the related penalties. The identifier k refers to
the type of information conveyed in the announcement. When k = all announcements, we sum
over all initial and subsequent announcements; as reported above, the mean value of n(k = all
announcements)j is 4.99. We also sum over only announcements that contain information about
bribery (k = bribery only), information about bribery and financial misrepresentation (k = mixed),
and information only about misrepresentation (k = misrepresentation only).
For the full sample of 115 firms, the mean cumulative abnormal return is -8.98% (median
of -1.49%). Consistent with the evidence presented in Panels A and B, the magnitude of the loss
is significantly larger for enforcement actions that involve financial fraud. For 13 actions with
contemporaneous fraud charges, the mean cumulative abnormal return is -51.58% (median =
-22.22%). For the 102 actions without fraud charges, the mean cumulative abnormal return is
-3.55% (median = -1.15%).
Among the 115 actions in the sample, 90 have at least one announcement that contains
information only about the firms bribery. For each of these 90 actions, we calculate

20

CAR(k=bribery only)j and find that the mean value of CAR(k=bribery only)j is -1.46% (median of
-0.52%). In 103 actions, there is at least one announcement that contains co-mingled information
about bribery and financial misrepresentation. The mean value of CAR(k=mixed)j is -1.60%
(median of -0.55%). In 21 actions, there are announcements related to the bribery enforcement
action, but which contain specific information only about the contemporaneous financial
misrepresentation. The mean value of CAR(k=misrepresentation only)j is -35.07% (median of
-8.48%). Similarly significant differences persist when we segregate enforcement actions into
those with and without fraud charges and compare announcements pertaining only to bribery with
announcements pertaining only to financial misrepresentation.
These results indicate that, on average, information that a firm is targeted for a briberyrelated enforcement action triggers a significant reduction in share value. The losses, however,
are more closely related to charges of financial misconduct than to bribery. The losses are
greatest when the bribery violation is contemporaneous with financial fraud charges. Even
among firms that do not face fraud charges, the largest share price losses are associated with
revelations that these firms covered up the bribes by misrepresenting their financial numbers, not
with the bribery per se. Among the subsample of announcements that explicitly mention bribery
violations, the average share price reaction is negative. But even here, the share price losses are
small in magnitude and statistically significant only at the 10% level.

6. Direct costs imposed by bribery enforcement actions

The results in Table 6 indicate that firms facing bribery enforcement actions lose share
value, on average, although most of the losses are associated with charges of financial fraud
and/or misrepresentation. In this section we investigate the extent to which the losses in share
value can be attributed to fines, penalties, investigation, and legal expenses.

21

6.a. Fines and penalties

Table 7 summarizes the monetary fines and penalties imposed on the sample firms by the
SEC and DOJ, and via class action lawsuits. These include fines, criminal penalties, and civil
judgments.17 The mean penalty imposed by regulators is $43.08 million. The mean, however,
reflects several large outliers, including a penalty of $1.657 billion levied against Siemens and
$600.2 million against Halliburton/KBR, both of which had bribery programs that extended over
many years. The median penalty is $3.78 million.
Class action lawsuits were filed in conjunction with 16 of the 115 enforcement actions,
resulting in settlements that total $3,341.87 million.18 Most of this, however, reflects a large
private settlement of $3,053 million by Tyco International, Inc. for a massive financial fraud, with
which bribery charges were only tangentially related. Note that the mean fine imposed by
regulators is higher in the 102 actions that do not involve financial fraud ($46.00 million versus
$20.16 million), whereas the private lawsuit settlements tend to be larger among the 13 actions
that do involve fraud ($7.13 million versus $545.10 million). Summing monetary penalties from
both regulators and private lawsuits, the unconditional mean is $72.14 million (median of $4.33
million). For the 102 bribery but no-fraud actions, the mean monetary penalty is $46.70 million
and the median is $4.74 million. For the 13 fraud-related actions, the mean is much larger,
$271.75 million, but the median is smaller, $0.53 million.
These results indicate that monetary penalties of some type are imposed in most bribery
actions. In some actions the penalties are large. But for the median enforcement action the direct
legal penalty is small. The bottom rows in Table 6 report that the mean monetary penalty is
0.98% of the firms market capitalization, and the median is 0.07%. The monetary penalties are

17

As of December 31, 2011, some enforcement actions may still be ongoing and could lead to additional
penalties, such that our numbers understate the amount of the penalties that are eventually meted out for
these actions. Offsetting this concern is the fact that, in our sample, firms tend to settle quickly. So any
lingering charges are likely to be directed at individuals rather than the firms in the sample.
18
The U.S. Supreme Court has ruled there is no private right of action conferred under any of the
provisions of the FCPA. Therefore, all related class action lawsuits are brought under other securities laws.
22

larger, on average, when financial fraud charges are included, but the difference is not statistically
significant.19

6.b. Investigation and legal expenses

The U.S. Chamber of Commerce claims that firms that are targeted for anti-bribery
enforcement actions, spend enormous sums on legal fees, forensic accounting, and other
investigative costs before they are even confronted with a fine or penalty (Weissmann and
Smith, 2010, p. 5). To investigate this claim we collected data on firms reported direct expenses
incurred as a result of their bribery investigation. We searched all 10-K, 10-Q and 8-K filings for
the period from the initial revelation of bribery to the resolution of the enforcement action, and
found self-reported data on these expenses for 33 of our 115 sample firms.
Panel A of Table 8 reports a summary of these direct legal and forensic expenses. The
mean expense is $71.05 million, with a median of $11.00 million. The minimum reported
amount is $500,000, and the maximum, reported by Siemens AG, is $1.2 billion. These selfreported expenses undoubtedly reflect reporting biases. They may include allocated expenses
that are not directly related to the firms bribery-related legal expenses. They may underreport
the costs of managers time in dealing with the bribery charges. It also is not clear whether the
subset of firms that report their direct legal expenses have higher or lower expenses compared to
firms that do not report these expenses. Nonetheless, the numbers from these firms provide a
rough estimate of the magnitude of these firms legal expenses due to their bribery-related
charges. Among these 33 firms, the mean reported legal expense equals 1.53% of the firms

19

In addition to these monetary fines and penalties, the SEC and DOJ frequently impose non-monetary
sanctions. A tally of such sanctions is provided in Appendix Table A-2. The SEC imposed administrative
and civil sanctions against a total of 91 firms in the sample, including cease and desist orders, permanent
injunctions, trading suspensions, registration revocations, and debarments of officers, directors, and
attorneys. The DOJ imposed sanctions or obtained criminal convictions in 71 of the enforcement actions.
Once again, the actions that include fraud charges result in more severe sanctions, including prison
sentences and probation. A total of 68 individuals have received prison sentences, with an average length
of 13.3 months.
23

market capitalization, and the median is 1.07%. For one firm Innospec, Inc. the ratio of
investigation costs to market capitalization is 13.63%. Removing this outlier, firms incur internal
costs related to its bribery investigation that average 1.15% of the firms market capitalization
(median = 1.02% of market capitalization).
Panel B of Table 8 reports the results a simple truncated type I Tobit model of the
determinants of these firms investigation costs, using data from these 32 firms. The
investigation cost is negatively related to log(market capitalization) and the length of the violation
period. It is positively related to the fraction of the firms sales that are attributable to the bribe
payments, the number of countries involved in the bribery investigation, and the number of
unique charges brought by regulators. Panel C shows that the fitted values of investigation costs
for the 32 reporting firms closely approximate their actual investigation costs.
We use the estimators from the regression in Panel B to predict the investigation costs for
the firms with missing values, and use these fitted values where we do not have direct
observations. As shown in Panel D of Table 8, the mean of the fitted values is 1.13% of market
capitalization, with a median of 0.69%. Whether we use the subset of firms for which we have
direct data, or include estimates from all other firms, the results in Table 8 indicate that, on
average, firms that are targeted for bribery enforcement actions spend in the neighborhood of 1%
of market capitalization on internal investigation and legal expenses.

7. Indirect costs imposed by bribery enforcement actions

7.1. Restatement effect
Table 9 gathers results reported in Tables 6, 7, and 8 to compare of the sources of
shareholder loss associated with bribery enforcement actions. Averaging over all 115 bribery
enforcement actions in the sample, the mean cumulative loss in share value is 8.98%. On
average, firms pay fines and penalties equal to 0.98% of market capitalization, and incur
investigation and legal costs equal to an additional 1.13% of market capitalization. This leaves an
24

average 6.87% loss in share value unaccounted for and suggests that firms pay substantial indirect
costs associated with their bribery enforcement actions, in addition to the direct costs reflected in
fines, penalties, and investigation costs.
One indirect cost is that investors re-value the firm in light of information that the firms
financial statements previously were incorrect. The revaluation may reflect investors judgment
that share prices previously were inflated by false financial information (see Karpoff, Lee, and
Martin, 2008). In bribery actions that do not involve fraud, the financial statement inaccuracies
typically reflect attempts to conceal bribery payments rather than to inflate assets or deflate
liabilities. Yet, share prices may fall simply because investors learn that the firms financial
statements are less transparent than previously thought. Some of the events included in our
measure of the cumulative loss in share values are financial restatements. As a crude estimate of
the restatement effect on share values, we subtract the abnormal loss in share values on such
restatement days. Averaging over all 115 firms, the mean share value loss on restatement
announcements that are associated with the misconduct is 1.09%. The median firm has no
restatement events, so the median restatement effect is zero. Among actions without financial
fraud charges, the mean restatement effect is 0.81% of market capitalization, and among actions
with fraud charges, the mean is 3.29%. This shows that bribery enforcement actions that involve
financial fraud charges are associated with more significant financial restatements.

7.2. Reputation loss

Among the arguments for less intense bribery enforcement is the view that firms that are
charged with foreign bribery suffer large reputational losses in the form of decreased sales and
increased costs.20 Previous research shows that many firms experience reputational losses when
they are discovered to engage in other types of illegal or opportunistic behavior. Indeed, for some

20

Ibid fn. 2. See also Smith et al. (1984), Hines (1995), and Weissmann and Smith (2010).
25

types of misconduct, the reputation loss swamps all of the direct costs incurred by the firm, and
represents the most consequential impact on firm value.21
The results summarized in Table 9 provide evidence on the magnitude of the reputational
loss associated with bribery enforcement actions. For all 115 actions in the sample, the mean
cumulative loss in share value is -8.98%. Fines, penalties, investigation, and legal costs, plus the
restatement effect, together explain 3.20% of that loss. Following Jarrell and Peltzman (1985),
Murphy, Shrieves, and Tibbs (2009), and others, we can interpret the difference, 5.78%, as an
estimate of the average reputational loss experienced by firms facing sanctions for foreign
bribery.
These data, however, are influenced by the subsample of actions in which the bribery
enforcement action is mixed with charges for financial fraud. Excluding actions that include
financial fraud yields a sample that more narrowly represents the impacts of bribery enforcement.
For the sample of 102 actions in which there are no financial fraud charges, the mean cumulative
share loss is 3.55%. We can attribute an average of 0.92% of the 3.55% loss to the fines and
penalties paid by these firms, 1.02% to their investigation and legal costs, and an additional
0.81% to the effects of their corresponding financial restatements. This yields an estimate of the
average reputational loss from the bribery component of these enforcement actions equal to
0.80% of market capitalization.
There are, however, two reasons to regard this 0.80% point estimate to be an
overestimate of the reputational loss attributable to bribery. First, it reflects the influence of a

21

In this literature, a reputation loss refers to the present value of the firms loss that accrues when
counterparties change the terms of trade by which they are willing to do business. For example, firm that
sell defective products have lower sales (Karpoff and Lott 1993), and firms that restate earnings have
higher borrowing costs (Graham et al. 2008). Reputation losses are important for false advertising
(Peltzman 1981), product recalls (Jarrell and Peltzman 1985), air safety disasters (Mitchell and Maloney
1989), environmental violations (Karpoff, Lott and Wehrly, 2005), frauds of private parties (Alexander
1999; Murphy, Shrieves, and Tibbs 2009), investigations of IPO underwriters (Beatty, Bunsis, and Hand
1998), defense procurement fraud (Karpoff, Lee, and Vendrzyk 1999), financial misrepresentation
(Karpoff, Lee and Martin, 2008), venture capital (VC) firms that face lawsuits from business partners
(Atanasov, Ivanov and Litvak, 2011), VC firms and the post-IPO performance of their portfolio firms
(Krishnan, Ivanov, Masulis and Singh (2012), and repurchase completion rates (Adams Bonaime, 2012).
26

skew in the distribution of the cumulative loss in share values. Using medians, the upper bound
estimate of the reputational loss is negative 0.65% of market capitalization, indicating no
reputational loss. Second, it is likely that some of the impacts on share values reflect the impact
of financial misrepresentation, not bribery. That is, many of the announcements used to calculate
the 0.80% point estimate of the reputational loss include information about these firms financial
misrepresentation (although not fraud). It is difficult to separate the effects of bribery and
financial misrepresentation in measuring the impact on share values and the direct costs.22
Among the 13 firms whose bribery charges accompany charges of financial fraud, the
estimate of the reputation loss is very large, with a mean of 44.82% of market capitalization
(median of 18.17%). The t-statistic for the difference between these estimates and those for the
no-fraud sample is significant at the 10% level, and the Wilcoxon test statistic is significant at the
5% level. These results indicate that, even if we accept the 0.80% point estimate in the briberyonly sample as a measure of the average reputation loss for firms targeted by bribery enforcement
action, firms reputational loss for engaging in foreign bribery is extremely small compared to the
reputational loss when the firm also faces charges for financial fraud.

7.3. Determinants of the indirect costs from bribery enforcement actions

Table 10 reports on multivariate tests that shed further light on the nature of the indirect
costs incurred by firms that are targeted by bribery enforcement actions. We report ordinary least
squares estimates with robust estimators from cross-section regressions using data on all 115
firms that were targeted in bribery-related enforcement actions from 1978-2011. In Model 1, the

22

As one approach, we could use the information in Panel C of Table 5 on the cumulative loss in share
values on just the announcements of bribery -1.11% for the 82 non-fraud actions), or for mixed bribery and
accounting announcements (-1.26% for the 91 non-fraud actions). But our data on fines and penalties, and
investigation costs, comingle the effects of both bribery and misrepresentation. For example, the
investigation costs reflect the costs of examining the internal compliance breakdowns that led to the bribery
with the costs of examining the internal financial controls that enabled a cover-up of the bribery. So, we
can estimate of the gross cost to the firm from announcements related solely to bribery (e.g., 1.11% of
market capitalization), we cannot allocate the fines and penalties, or the investigation costs, that are due to
the bribery enforcement activities as opposed to the financial misrepresentation.
27

dependent variable is the size of all indirect costs, defined as the firms cumulative abnormal
return, CAR(k=all events)j, minus its fines, penalties, investigation and legal costs measured as a
fraction of market capitalization. In Model 2, the dependent variable is the reputation loss, which
is the indirect cost minus the abnormal return on days during the enforcement period in which the
firm announced a restatement.
We examine three types of potential determinants of firms indirect costs: firm
characteristics, bribe characteristics, and enforcement characteristics. Firm characteristics
include: (i) the natural log of the firms market capitalization, measured the day before the initial
public revelation of the misconduct; (ii) Transparency Internationals Industry Sector Score of
the targeted firm, with higher values representing industries in which bribery is thought to be rare;
and (iii) Transparency Internationals Bribe Payers Index, with higher values representing firms
from countries that are considered relatively free of corruption.
Characteristics of the bribe include: (i) the number of countries involved in the bribery
activities; (ii) the violation period, measured as the number of years the bribery violation
persisted; (iii) the sales influenced by the bribes, as a percent of the firms total sales; (iv)
Transparency Internationals Corruption Perceptions Index of corruption for the country in which
the bribe occurred, with higher values indicating less corruption; (v) Transparency Internationals
Global Corruption Barometer, with lower values indicating less corruption (vi) a dummy variable
set equal to one for the 19 actions in our sample that involve bribery in the United Nations oilfor-food scandal in Iraq, and (vi) the United Nations Human Development Index for the country
in which the bribery occurred, with lower values indicating less development. If the bribe
charges involve more than one country we compute the average of the corresponding countries
CPI, GCB, and HDI values.
Characteristics of the enforcement action include: (i) the number of firm and individual
respondents named in all SEC and DOJ releases related to the bribery action; (ii) an indicator
variable set equal to one if the bribery charges are accompanied by charges of financial
28

misrepresentation, (iii) an indicator variable set equal to one if the bribery charges are
accompanied by charges of financial fraud; (iv) an indicator variable set equal to one if the
enforcement action was accompanied by a private class action lawsuit; and (v) the number of
specific violations cited in the enforcement action related to the misconduct, as summarized in
Appendix Table A-1.
The results are reported in Table 10. Indirect costs and the reputation loss both are
positively related to the log of the firms market capitalization, indicating that indirect costs tend
to increase with firm size. Total indirect costs are positively related to TIs Industry Sector Score,
indicating that such costs increase when the bribing firm operates in an industry where bribes are
perceived as relatively rare. The GCB index is the sole bribe characteristic that is significantly
related to indirect costs. The positive relation, significant at the 10% level, suggests that bribes
paid in countries that are perceived to be more corrupt result in larger indirect losses for firms
caught bribing in those countries.
The most significant influence on indirect costs, however, comes from the characteristics
of the enforcement activity. Total indirect costs and the reputation loss both are larger when the
firm faces a class action lawsuit, and when there are more respondents named in the enforcement
agencies proceedings. Consistent with the summary statistics in Table 9, indirect costs are
higher when the firm faces a contemporaneous charge for financial fraud. The reputation loss
also is larger when fraud charges are brought, although because of a large standard error, the
estimate has a p-value of .103.
We interpret the results in Table 10 as indicating that, in the cross section of firms, total
indirect costs and reputational losses are relatively insensitive to the characteristics of the bribery.
They are affected more by the nature of the enforcement action. Misconduct that triggers class
action lawsuits, involves many firm employees, and involves financial fraud charges is associated
with relatively large indirect costs and large reputational losses. In separate tests, we find that
each of these variables is positively related to the inclusion of financial misrepresentation
29

charges. That is, the total indirect costs and the reputational loss are relatively high when the firm
faces charges for financial misrepresentation. The specific characteristics of the bribery, in
contrast, are not main drivers of the firms indirect costs.

8. Discussion and conclusion

The enforcement of U.S. anti-bribery laws is controversial. Critics argue that
enforcement of the FCPA increases the cost of business for U.S. firms, inefficiently decreases
foreign investment, and represents regulatory overreach by the SEC and DOJ. Defenders argue
that aggressive anti-bribery enforcement helps to improve business culture and productivity, not
only for U.S. firms, but also for other firms around the world. At the center of the debate is the
question of how costly anti-bribery enforcement actions are for the firms that are charged with
bribery.
Using data from all 115 publicly traded firms targeted by anti-bribery enforcement
actions from 1978 2011, we find that, on the surface, the costs appear to be very large. Direct
costs including fines, penalties, private lawsuit settlements, investigation expenses, and legal
fees average 2.11% of market capitalization. The indirect costs are even larger. Using event
study methods, our mean estimate of the indirect costs is 6.87% of market capitalization.
Upon closer inspection, however, most of these costs are due not to these firms bribery
charges, but rather, to the charges of financial misrepresentation and fraud that typically
accompany bribery-related enforcement actions. The total direct and indirect costs average
51.58% of market capitalization when the enforcement action includes charges for financial
fraud, compared to 3.55% when there are no such accompanying charges. When we examine the
content of the specific announcements that constitute an enforcement action, most of the share
price losses occur when the announcement contains information about the financial
misrepresentation that accompanies most bribery actions. When the initial announcement about
firm misconduct reports only about bribery, the abnormal loss in share values is small (0.74%)
30

and statistically insignificant. When the initial announcement conveys information that the firm
also misrepresented its financial statements, in contrast, the abnormal loss in share values is ten
times as large (7.4%), and is statistically significant.
These results indicate that firms facing sanctions for violating the FCPAs anti-bribery
rules face substantial costs. But the costs are mostly due to the financial misrepresentation that
typically accompanies bribery, not the bribery per se. Because of the bundled nature of most
bribery and financial misrepresentation charges and penalties, we cannot allocate how much of
the direct costs are due solely to the bribery charges. We can infer, however, that the total
indirect cost of bribery charges and particularly the reputation loss component is small or
negligible, on average.
Previous researchers report that the penalties for some types of misconduct are large,
particularly because they include reputation losses. Examples include false advertising (Peltzman
1981), product recalls (Jarrell and Peltzman 1985; Barber and Darrough, 1996), air safety
disasters (Mitchell and Maloney 1989), frauds of private parties (Karpoff and Lott 1993;
Alexander 1999; Murphy, Shrieves, and Tibbs 2009), investigations of IPO underwriters (Beatty,
Bunsis, and Hand 1998), defense procurement fraud (Karpoff, Lee, and Vendrzyk 1999), and
opportunistic behavior by venture capital firms (Atanasov, Ivanov, and Litvak, 2011). The
penalties are large because a firms counterparties its customers, suppliers, investors, and
employees change the terms with which they are willing to do business when the firm reveals
that its managers have behaved opportunistically in ways that are costly to counterparties. Other
types of misconduct, however, are associated with small reputational losses. These include
environmental violations (Jones and Rubin 2001; Karpoff, Lott, and Wehrly 2005) and frauds of
unrelated parties (Alexander 1999; Murphy, Shrieves, and Tibbs 2009).
Our findings indicate that, in its impact on firm reputation, bribery is more like an
environmental violation and less like consumer fraud. That is, firms do not suffer large

31

reputational losses when they are caught bribing. When the bribe is accompanied by financial
misrepresentation, in contrast, the reputational loss tends to be large.
This, in turn, implies that, on average, bribery charges do not by themselves lead to
irreparable economic hardship and reputational damage that may adversely affect the overall
stability and competitiveness of any business.23 At times, firms that are targeted by bribery
enforcement actions may experience large direct costs, especially in the form of large regulatory
fines and penalties. On average, however, the bribery charges do not harm the firms business
relationships with its customers, suppliers, or investors. That is, the firms counterparties tend to
care if the firms financial statements are misrepresented. But they do not, in general, alter their
willingness to do business with the firm when it is caught bribing.

23

Ibid, fn. 2.
32

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35

Table 1. Distribution of bribery-related enforcement actions by industry sector and firm size
Size-based distribution of the publicly traded firms targeted by all 115 enforcement actions for foreign bribery initiated by the SEC and/or DOJ from
1978-2011 partitioned across Transparency Internationals (TI) industry sectors and size-based deciles. TIs Sector Score is based on survey responses,
and measures the perceived likelihood that firms in the industry pay bribes to obtain or retain business in foreign countries. The Sector Score is scaled
from 0-10, with higher scores indicating lower perceived likelihood that firms in the industry bribe. For 2011, the average Sector Score is 6.6. Firms in
the sector is the number of active firms in Compustat in each TI-defined sector for fiscal year 2010. Equity size deciles reflect CRSP
NYSE/AMEX/NASDAQ portfolio assignments. Tests of proportionate frequencies between the sized-based deciles and industry sectors are rejected
with Chi-Squares of 170.84 and 158.68 respectively, both with p-values < .001.

Sector
Agriculture
Light manufacturing
Civilian aerospace
Information technology
Banking and finance
Forestry
Consumer services
Telecommunications
Transportation and storage
Fisheries
Arms, defense and military
Heavy manufacturing
Pharmaceutical and healthcare
Power generation and transmission
Mining
Oil and gas
Real estate, property, legal &
business services
Utilities
Public works contracts &
construction
Total

Sector
Score
7.1
7.1
7.0
7.0
6.9
6.9
6.8
6.7
6.7
6.6
6.6
6.5
6.4
6.4
6.3
6.2

Firms in the
sector
% of
all
Number
firms
27
0.4%
132
2.2%
25
0.4%
867
14.2%
1,196
19.5%
9
0.1%
462
7.5%
211
3.4%
181
3.0%
0
0.0%
29
0.5%
1,032
16.9%
706
11.5%
182
3.0%
178
2.9%
358
5.8%

Bribery
actions
% of
all
Number actions
4
3.5%
0
0.0%
0
0.0%
8
7.0%
2
1.7%
0
0.0%
0
0.0%
5
4.3%
4
3.5%
0
0.0%
8
7.0%
46
40.0%
13
11.3%
0
0.0%
0
0.0%
19
16.5%

Sized-Based Deciles:
Larger Firms
10

4
2
2

0.9%

6.1

54

0.9%

0.0%

5.3

146

2.4%

4.3%

115

100%

59

1
1

11

36

1
2
6
1

5.3%

7
1

5
4

327

100%

8
2

5
27
5

6.1

6,122

9
1

Smaller Firms
31

1
1
1

1
3

1
2
2

3
1

1
1
17

11

1
3

Table 2. Home country and security type

Home country location and type of security traded in U.S. markets of the publicly traded firms in the 115
enforcement actions for foreign bribery initiated by the SEC and/or DOJ from 1978 through 2011. Each
home country is reported with Transparency Internationals 2011 Bribe Payers Index (BPI). The BPI ranks
28 of the worlds largest economies according to the perceived likelihood that companies from these
countries pay bribes abroad. Higher BPI scores indicate a lower likelihood of using bribery.

Panel A - Home country of firms

Country
United States
Netherlands
Germany
Switzerland
United Kingdom
France
Italy
Panama1
Bermuda1
Denmark2
Hungary3
Luxembourg4
Norway5
Sweden

Frequency
87
5
4
4
3
2
2
2
1
1
1
1
1
1
115

Percent
75.65
4.35
3.48
3.48
2.61
1.74
1.74
1.74
0.87
0.87
0.87
0.87
0.87
0.87
100.00

BPI
8.3
8.8
8.6
8.8
8.3
8.0
7.6
7.6
7.5
8.7
7.5
8.4
8.8
8.8

Proxies employed:
1.
Average of United States, Brazil, Argentina and Mexico.
2.
Average of Germany, Netherlands and Sweden.
3.
Average of Germany, Italy and Russia.
4.
Average of Belgium, France and Germany.
5.
Sweden.

Panel B - Type of security traded in U.S. markets

Security
Common stock
ADR

Frequency
94
21
115

37

Percent
81.74
18.26
100.00

Table 3. Characteristics of firms targeted for anti-bribery enforcement action

This table reports coefficient estimates of fixed-effects logistic regressions using data on all Compustatlisted firms from 1978 through 2011. In Model 1, the (untransformed) dependent variable equals one in the
year the bribery was publicly revealed. In Model 2, the (untransformed) dependent variable equals one for
each year during the violation period, i.e., the years in which the bribes were being paid. Log(Market
capitalization) is the natural logarithm of stock market capitalization. Market-to-book is market value of
equity plus total assets minus common equity divided by total assets. Current ratio is current assets
divided by current liabilities. Total asset turnover is sales divided by total assets. Leverage ratio is longterm debt divided by total assets. Return on assets is net income divided by total assets. Intangibles-tototal assets are intangible assets divided by total assets. % Foreign sales are the firms foreign sales
divided by total sales. Big 8 auditor flag =1 if the firms auditor was one of the Big 8 auditing firms.
Market-to-book, current ratio, total asset turnover, leverage ratio, and return on assets are Winsorized at
the 1st and 99th percentiles. Industry using 2-digit SIC codes and year dummies are included. p-values,
reported below the coefficient estimates, are calculated using robust standard errors clustered by firm. *,
**, and *** indicate statistical significance at the 10%, 5%, and 1% levels.
Model 1:
Year
Revealed
0.4667***
<.001

Model 2:
Violation
Period
0.5748***
<.001

Market-to-book

-0.3188*
0.072

-0.2107**
0.050

Current ratio

-0.1507**
0.030

-0.022
0.925

0.0862
0.643

-0.1359
0.393

0.9725***
0.002

0.9274***
0.002

Return on assets

0.3742
0.386

0.3551
0.232

Intangibles-to-total assets

0.1359
0.828

0.6700
0.309

% Foreign sales

1.2682***
<.001

1.6141***
<.001

Big 8 auditor flag

0.0288
0.944

-0.0477
0.911

Industry dummies
Year dummies
Constant

Included
Included
-9.1125
<.001

Included
Included
-6.4972
<.001

N
Pseudo R2
Log likelihood2
2
Prob > F

126,874
0.2053
-692.45
644.50
<.001

178,478
0.2749
-2424.47
1,640.01
<.001

Log(Market capitalization)

Total asset turnover

Leverage ratio

38

Table 4. Countries where bribes were paid

Frequency of countries in which 354 bribes occurred in all 115 enforcement actions for foreign bribery
under the FCPA from 1978 2011 that targeted publicly-traded firms. The columns include the 2011
Transparency International Corruption Perception Index (CPI) and the associated country rank; the 2010
Global Corruption Barometer (GCB) (rankings are not published for this index); and the United Nations
2011 Human Development Index (HDI) and the associated country rank. The CPI is measured for 178
countries on a scale of 1 (most corrupt) to 10 (least corrupt) and is based on a survey of country analysts
and business people. The GCB ranks countries from 0 (no corruption) to 1 (complete corruption) and is
based on surveys of the general publics views on and experiences of corruption. The HDI ranks countries
by the level of human development on a scale from 0 (least developed) to 1 (most developed). Bribes were
paid in three countries that are not included in the TI or UN indices, so we assign index values from related
countries. Antigua and Turks & Caico each received the UK index values because they were part of the
British Commonwealth at the time of the bribe. Cook Islands received New Zealands index values and
rankings because it is an associated state of New Zealand.

Country
Iraq
Nigeria
China
Indonesia
Saudi Arabia
Egypt
India
Mexico
Argentina
Thailand
Greece
Iran
Venezuela
Angola
Brazil
Cote D'Ivoire
Kazakhstan
Russia
Turkey
United Arab Emirates
Bangladesh
Colombia
Ecuador
France
Italy
Malaysia
South Korea
Taiwan
Vietnam
Algeria
Bahrain
Chile
Gabon
Israel
Montenegro
Nicaragua
Niger
Oman
Philippines
Poland
Romania
Uzbekistan
Azerbaijan
Benin
Bolivia
Costa Rica
Czech Republic

No. of
bribery
actions
24
23
21
13
10
9
9
8
7
7
6
6
6
5
5
5
5
5
5
5
4
4
4
4
4
4
4
4
4
3
3
3
3
3
3
3
3
3
3
3
3
3
2
2
2
2
2

CPI
1.8
2.4
3.6
3.0
4.4
2.9
3.1
3.0
3.0
3.4
3.4
2.7
1.9
2.0
3.8
2.2
2.7
2.4
4.2
6.8
2.7
3.4
2.7
7.0
3.9
4.3
5.4
6.1
2.9
2.9
5.1
7.2
3.0
5.8
4.0
2.5
2.5
4.8
2.6
5.5
3.6
1.6
2.4
3.0
2.8
4.8
4.4

39

Transparency
International
CPI Rank
175
143
75
100
57
112
95
100
100
80
80
120
172
168
73
154
120
143
61
28
120
80
120
25
69
60
43
32
112
112
46
22
100
36
66
134
134
50
129
41
75
177
143
100
118
50
57

GCB
0.559
0.628
0.093
0.182
0.335
0.603
0.542
0.312
0.124
0.227
0.176
0.548
0.200
0.540
0.039
0.558
0.548
0.255
0.326
0.335
0.548
0.235
0.190
0.071
0.128
0.091
0.024
0.071
0.439
0.603
0.335
0.212
0.540
0.043
0.125
0.183
0.183
0.335
0.161
0.151
0.282
0.548
0.471
0.558
0.299
0.315
0.137

United
Nations
HDI Rank
0.573
132
0.459
156
0.687
101
0.617
124
0.770
56
0.644
113
0.547
134
0.770
57
0.797
45
0.682
103
0.861
29
0.707
88
0.735
73
0.486
148
0.718
84
0.400
170
0.745
68
0.755
66
0.699
92
0.846
30
0.500
146
0.710
87
0.720
83
0.884
20
0.874
24
0.761
61
0.897
15
0.687
101
0.593
128
0.698
96
0.806
42
0.805
44
0.674
106
0.888
17
0.771
54
0.589
129
0.295
186
0.705
89
0.644
112
0.813
39
0.781
50
0.641
115
0.700
91
0.427
167
0.663
108
0.744
69
0.865
27

Table 4. (continued)
Country
FYR Macedonia
Germany
Ghana
Hungary
Kuwait
Liberia
Luxembourg
Mali
Netherlands
Pakistan
Panama
Portugal
Qatar
Senegal
Singapore
Spain
Trinidad and Tobago
Uganda
Antigua
Austria
Belarus
Belgium
Bosnia and Herzegovina
Brunei
Bulgaria
Burkina Faso
Canada
Cape Verde
Congo Republic
Croatia
Cyprus
Dominican Republic
Equatorial Guinea
Gambia
Guatemala
Guinea
Guinea-Bissau
Honduras
Japan
Jordan
Kenya
Kyrgyzstan
Latvia
Lebanon
Libya
Malawi
Mauritania
Moldova
Mongolia
Morocco
Mozambique
Myanmar
Norway
Peru
Rwanda
Sao Tome and Principe
Serbia
Sierra Leone
Slovakia
Syria
Togo
Turkmenistan
Turks and Caicos Islands
Ukraine
United Kingdom
Uruguay
Yemen

No. of
bribery
actions
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1

Transparency
International
CPI CPI Rank
3.9
69
8.0
14
3.9
69
4.6
54
4.6
54
3.2
91
8.5
11
2.8
118
8.9
7
2.5
134
3.3
86
6.1
32
7.2
22
2.9
112
9.2
5
6.2
31
3.2
91
2.4
143
7.8
16
7.8
16
2.4
143
7.5
19
3.2
91
5.2
44
3.3
86
3.0
100
8.7
10
5.5
41
2.2
154
4.0
66
6.3
30
2.6
129
1.9
172
3.5
77
2.7
120
2.1
164
2.2
154
2.6
129
8.0
14
4.5
56
2.2
154
2.1
164
4.2
61
2.5
134
2.0
168
3.0
100
2.4
143
2.9
112
2.7
120
3.4
80
2.7
120
1.5
180
9.0
6
3.4
80
5.0
49
3.0
100
3.3
86
2.5
134
4.0
66
2.6
129
2.4
143
1.6
177
7.8
16
2.3
152
7.8
16
7.0
25
2.1
164

40

GCB
0.215
0.023
0.373
0.242
0.335
0.892
0.159
0.558
0.024
0.494
0.315
0.032
0.335
0.560
0.088
0.050
0.252
0.857
0.252
0.089
0.270
0.064
0.225
0.256
0.081
0.558
0.039
0.558
0.540
0.049
0.335
0.252
0.540
0.558
0.315
0.558
0.558
0.315
0.089
0.335
0.447
0.548
0.154
0.337
0.603
0.574
0.558
0.368
0.476
0.603
0.574
0.256
0.014
0.220
0.574
0.540
0.174
0.712
0.234
0.335
0.558
0.548
0.252
0.339
0.014
0.190
0.335

United
Nations
HDI Rank
0.728
78
0.905
9
0.541
135
0.816
38
0.760
63
0.329
182
0.867
25
0.359
175
0.910
3
0.504
145
0.768
58
0.809
41
0.831
37
0.459
155
0.866
26
0.878
23
0.760
62
0.446
161
0.764
60
0.885
19
0.756
65
0.886
18
0.733
74
0.838
33
0.771
55
0.331
181
0.908
6
0.568
133
0.533
137
0.796
46
0.840
31
0.689
98
0.537
136
0.420
168
0.574
131
0.344
178
0.353
176
0.625
121
0.901
12
0.698
95
0.509
143
0.615
126
0.805
43
0.739
71
0.760
64
0.400
171
0.453
159
0.649
111
0.653
110
0.582
130
0.322
184
0.483
149
0.943
1
0.725
80
0.429
166
0.509
144
0.766
59
0.336
180
0.834
35
0.632
119
0.435
162
0.686
102
0.863
28
0.729
76
0.863
28
0.783
48
0.462
154

Table 5. Characteristics of the bribe and benefit derived

This table reports summary statistics on characteristics of the bribes for all 115 publicly traded firms
targeted by anti-bribery enforcement actions from 1978 2011. Panel A reports on the intended effects of
the bribes. Panel B reports on the sizes and violation periods of the bribes, amount of sales that the bribes
sought to influence, and the net benefits obtained. Pecuniary gain is the additional multi-period before-tax
profit to the defendant resulting from the bribe using information in the SEC and DOJ filings related to the
action. Because early actions inconsistently reported either sales or before-tax profit, each firms annual
profit margin and tax rate, according to Compustat, were used to derive the benefit metric that was not
reported.

Panel A - Purpose for the payments

The following table presents the relative frequencies of the purpose for which the bribe was used. The
sum of the frequencies (123) exceeds the number of actions (115) because eight bribes had multiple
purposes.

Benefit sought
Sales/revenue
Political/regulatory
Tax reduction
Total

Frequency
95
23
5
123

Percent of
reasons given
77.2%
18.7%
4.1%
100.0%

Percent of
actions
82.6%
20.0%
4.2%

Panel B - Size of the payments and expected benefits derived (N=115)

Description

Mean

Median

Minimum

Maximum

Size of bribe

26,849,995

1,000,000

1,250

1,791,700,000

5.09

4.00

0.46

24.75

1,017,932,429

36,558,595

12,495

39,825,000,000

5.71%

3.30%

0.02%

40.00%

81,371,737,296

13,505,748,000

24,120,000

1,637,799,900,000

4.97%

0.36%

0.00%

200.00%

30,655,964

2,562,868

1,000

1,100,000,000

1.35

2.46

0.13

204.80

Period of violation (years)

Sales to be influenced
Bribe to sales influenced
Total sales during violation
Expected bribe-generated
sales to total sales
Expected pecuniary gain
Expected pecuniary gain to
bribe ratio

41

Table 6. Abnormal returns for FCPA bribe related enforcement announcements

This table reports on the abnormal stock returns for the targeted companies for key dates on which
information was publicly revealed about the bribery, related misconduct, and the enforcement activities
regarding the misconduct. In each panel, we report means and medians for the sample of all 115 firms,
and for subsamples of firms that faced accompanying charges of financial fraud (n=13) and firms that did
not face financial fraud charges (n=102). Panel A reports mean and median one-day market-adjusted
returns for the initial revelation of the bribery-related misconduct. Panel B reports on the sum of the oneday market-adjusted returns for all subsequent informational events regarding the bribery-related
misconduct. These subsequent events include SEC and DOJ enforcement releases, earnings restatements,
and private lawsuits. Panel C reports on the sum of the one-day abnormal returns, summing over all
relevant information events for each bribery action. In each panel, the events are partitioned according to
the specific information contained in the announcement(s): bribery only, mixed bribery and
misrepresentation, and misrepresentation only. In Panel C, all events pertaining to a given bribery action
and for which the specific information is only about bribery (and not about misrepresentation), are
cumulated. Asterisks next to the mean and median represent statistical significance based on a parametric
t-test and rank sum test, respectively where ***, **, * indicate significance at the 0.001, 0.01, and 0.10
levels.
Panel A - All initial revelation dates
N
Mean
Median

All bribery
actions
115
-3.11%***
-0.26%***

Actions without
financial fraud
102
-1.60%**
-0.15%*

Actions with
financial fraud
13
-14.91%*
-3.33%**

Difference
13.31%*
3.18%***

Information in the announcement:

Related to bribery only (a)
N
Mean
Median
Mixed bribery and misrepresentation (b)
N
Mean
Median

74
-0.74%
-0.03%

71
-0.47%
-0.02%

3
-7.01%
-0.55%

6.54%
0.53%

28
-2.83%**
-1.13%***

22
-1.85%*
-0.43%*

6
-6.45%*
-2.91%*

4.60%*
2.48%*

Related to misrepresentation only (c)

N
13
Mean -17.19%*
Median -8.48%**

9
-9.92%*
-3.43%*

4
-33.53%
-31.96%

1.38%
0.41%*
9.45%
3.41%*
8.07%
3.00%

-0.56%
2.36%
26.52%
31.41%
27.08%
29.05%

23.61%*
28.53%

Differences
(a) (b)

Mean
Median
(a) (c) Mean
Median
(b) (c) Mean
Median

2.09%*
1.10%**
16.45%*
8.45%***
14.36%*
7.67%*

42

1.94%
-1.95%
-17.07%
-28.00%
-19.01%
-26.05%

Table 6. (cont)
Panel B - All subsequent announcements
All bribery
actions
459
-1.47%***
-0.55%***

Actions without
financial fraud
309
-0.64%***
-0.32%***

Actions with
financial fraud
150
-3.18%***
-1.12%***

144
-0.54%**
-0.25%**

125
-0.46%*
-0.23%*

19
-1.02%*
-0.43%*

0.56%
0.20%

190
-0.45%*
-0.31%*

165
-0.45%*
-0.38%*

25
-0.43%
-0.23%

-0.02%
-0.15%

N
Mean
Median

125
-4.10%***
-1.50%***

19
-3.50%*
-1.30%**

106
-4.21%***
-1.51%***

0.71%
0.21%

Mean
Median
(a) (c) Mean
Median
(b) (c) Mean
Median

-0.09%
0.06%
3.56%***
1.25%***
3.65%***
1.19%***

-0.01%
0.15%
3.04%*
1.07%*
3.05%*
0.92%*

-0.59%
-0.20%
3.19%**
1.08%*
3.78%**
1.28%**

0.58%
0.35%
-0.15%
-0.01%
-0.73%
-0.36%

All bribery
actions
115
-8.98%**
-1.49%***

Actions without
financial fraud
102
-3.55%**
-1.15%***

Actions with
financial fraud
13
-51.58%*
-22.22%***

N
Mean
Median

90
-1.46%**
-0.52%**

82
-1.11%*
-0.44%*

8
-5.04%*
-2.94%*

3.93%
2.50%*

Mixed bribery and misrepresentation (b)

N
Mean
Median

103
-1.60%**
-0.55%*

91
-1.26%*
-0.52%*

12
-4.13%*
-1.74%*

2.87%*
1.22%*

14
-11.12%*
-3.46%**

7
-82.96%*
-38.77%*

71.84%*
35.31%*

0.15%
0.08%
10.01%*
3.02%**
9.86%*
2.94%**

-0.91%
-1.20%
77.92%*
35.83%*
78.83%*
37.03%*

N
Mean
Median
Information in the announcement:

Difference
2.54%**
0.80%***

Related to bribery only (a)

N
Mean
Median
Mixed bribery and misrepresentation (b)
N
Mean
Median
Related to misrepresentation only (c)

Differences
(a) (b)

Panel C - Cumulative abnormal returns

N
Mean
Median
Information in the announcement:

Difference
48.03%*
21.07%***

Related to bribery only (a)

Related to misrepresentation only (c)

N
21
Mean -35.07%*
Median -8.48%***
Differences
(a) (b)

Mean
Median
(a) (c) Mean
Median
(b) (c) Mean
Median

0.14%
0.03%
33.61%*
7.96%***
33.47%*
7.93%***

43

1.06%
1.28%
-67.91%
-32.81%
-68.97%
-34.09%

Table 7. Monetary penalties for bribery violations

Stock market capitalization and monetary penalties imposed through federal sanctions and private civil
class action settlements relating to 115 enforcement actions for foreign bribery brought under the Foreign
Corrupt Practices Act from 1978-2011. The table presents monetary penalties assessed by regulators on
the firm only, related private class and derivative actions, and the total of all monetary penalties against
the firm. Penalties may change for 24 (twenty-two bribery and two financial fraud) enforcement actions
whose proceedings were ongoing as of December 31, 2011. Asterisks next to the mean and median in
the Difference column represent significance of a t-test and rank sum test respectively where ***, **, *
indicate significance at the 0.001, 0.01, and 0.10 levels.

($millions)
Market capitalization

Penalties imposed on firms

Class action/derivative
settlements

Total firm monetary

penalties

% total penalties to market

capitalization

N
Sum
Mean
Median
Min
Max

All bribery
actions
(115)
115
2,656,432.44
23,099.41
4,544.54
7.23
386,402.07

Actions
without
financial
fraud
charges
(102)
102
2,448,528.85
24,005.18
5,203.01
11.00
386,402.07

N
Sum
Mean
Median
Min
Max

115
4,953.79
43.08
3.78
0.00
1,657.00

102
4,691.70
46.00
4.52
0.00
1,657.00

13
262.09
20.16
0.30
0.00
103.00

25.84
4.22

N
Sum
Mean
Median
Min
Max

16
3,341.87
208.87
0.00
0.00
3,053.25

10
71.25
7.13
0.00
0.00
68.75

6
3,270.62
545.10
1.19
0.00
3,053.25

-538.00
-1.19

N
Sum
Mean
Median
Min
Max

115
8,295.66
72.14
4.33
0.00
3,109.35

102
4,762.95
46.70
4.74
0.00
1,657.00

13
3,532.71
271.75
0.53
0.00
3,109.35

-225.10
4.21

Mean
Median

0.98%
0.07%

0.92%
0.06%

1.47%
0.20%

-0.55%
-0.14%

44

Actions with
financial
fraud
charges
(13) Difference
13
207,903.60
15,992.58
8,012.60
492.42
4,710.59*
7.23
87,255.34


Table 8. Estimates of expenses incurred by firms for FCPA violations
Model of investigation expenses incurred by firms for FCPA violations based upon 33 of 115 actions
where expenses were reported in periodic reports filed with the SEC or made known to the public through
a public release. Panel A presents the statistics for the 33 observed values of investigation expenses.
Panel B presents the results of a censored Tobit regression model using the 32 known observations. Panel
C presents the statistics for the entire sample of the investigation expenses using the actual values where
available and the unconditional expected value for the missing observations.
Panel A - Investigation costs as a percent of market capitalization for 33 firms in sample
Market capitalization
Investigation costs
% of market capitalization
% of market capitalization1
1.

N
33
33
33
32

Mean
10,642.23
71.05
1.53%
1.15%

Median
1,291.28
11.00
1.07%
1.02%

Minimum
113.60
0.50
0.03%
0.03%

Maximum
79,338.11
1,200.00
13.63%
3.98%

The observation with largest value is removed as an outlier and influential observation.

Panel B Truncated regression estimation of investigation cost

Parameter

Estimate

Intercept
Log(market capitalization)
% sales influenced to total sales
Number of countries involved
Violation period (years)
Number of unique charges

0.0577
-0.0025
0.0421
0.0002
-0.0001
0.0007

Prob >
|t|
0.000
0.000
0.000
0.246
0.671
0.018

Panel C Comparison of actual vs. predicted investigation cost for 32 firms in sample
Actual %
Predicted %

N
32
32

Mean
1.15%
1.15%

Median
1.02%
1.06%

Min
0.03%
-0.17%

Max
3.98%
3.66%

Min
7.23
0.24
0.03%

Max
386,402.07
1,361.67
13.63%

Panel D - Investigation cost using estimates for missing observations1

Market capitalization
Investigation costs
% of market capitalization
1.

N
115
115
115

Mean
23,099.41
64.18
1.13%

Median
4,544.54
17.98
0.69%

Actual costs were used when available and predicted costs from the model were used for all other
observations with 15 predicted values Winsorized at the lowest observed value of 0.0333%.

45

Table 9. Summary of total costs and indirect costs for firms charged with foreign bribery
This table reports the mean and median values when firms cumulative total losses are partitioned into direct and indirect cost components. The
cumulative total loss is the negative of the sum of the market-adjusted one-day stock returns over all key informational events that pertain to a given
bribery-related enforcement action. Fines and penalties are the total fines and disgorgement levied against the firm by regulatory agencies plus class
action settlements paid by the firm (net of D&O insurance proceeds) divided by the firms market capitalization at the close of trading the day before the
initial public announcement of the misconduct. The Investigation and legal costs are calculated for 33 firms for which data are available. For the
remaining 82 firms, the investigation and legal costs are the fitted values from the model reported in Table 8. The Restatement effect is the sum of the oneday market-adjusted stock returns on days during the enforcement action on which the firm announced an earnings restatement. The Reputation loss is the
residual of the Cumulative total loss minus total direct costs minus the restatement effect. The difference column reports the difference in the means and
medians between the actions with and without fraud charges. Significance levels are based on a t-test and rank sum test, respectively, where ***, **, *
indicate significance at the 0.001, 0.01, and 0.10 levels.

All bribery actions

(115)
Mean
Cumulative total loss
(from Table 6, Panel C)

Median

Actions without financial

fraud charges
(102)
Mean

Median

Actions with financial

fraud charges
(13)
Mean

Median

Difference
Mean

Median

8.98% **

1.49% ***

3.55% **

1.46% ***

51.58% *

22.22% ***

-48.03% *

-20.76% ***

Fines and penalties

0.98% ***

0.07% ***

0.92% ***

0.06% ***

1.47% *

0.20% **

-0.55%

-0.14%

Investigation expense

1.13% ***

0.69% ***

1.02% ***

0.61% ***

2.00% ***

2.12% ***

-0.98% **

-1.51% ***

2.11% ***

1.06% ***

1.94% ***

0.84% ***

3.47% ***

2.72% ***

-1.53% *

-1.88% ***

Restatement effect

1.09% **

0.00% **

0.81% *

0.00% *

3.29% *

0.00%

-2.48%

0.00%

Reputation loss

5.78% *

-0.42%

0.80%

-0.65%

44.82% *

18.17% *

-44.02% *

-18.82% **

Total indirect cost

6.87% *

-0.08%

1.61%

-0.51%

48.11% *

18.17% *

-46.50% *

-18.68% ***

Direct costs:

Total direct costs

Indirect costs:

46

Table 10. Determinants of firms indirect costs from foreign bribery actions
The table reports ordinary least squares estimates and robust standard errors using data on all 115 briberyrelated enforcement actions involving publicly traded corporations from 1978-2011. The dependent in
Model 1 is the indirect cost, measured as the cumulative abnormal stock return over key informational
events in the enforcement period minus fines, penalties, investigation, and legal costs. In Model 2 the
dependent variable is the reputation loss, which is the indirect cost minus the (negative of the) abnormal
return on days during the enforcement period in which the firm announced a restatement. Explanatory
variables are defined in the text. The top number in each cell presents the estimated coefficient and the
bottom number reports the associated two-tailed p-value. *, **, and *** indicate significance at the 10%,
5%, and 1% levels.
Indirect
cost
Firm characteristics:
Log (market capitalization)
TI Industry Sector Score
TI Bribe Payers Index
Characteristics of the bribe:
Number of countries involved
Violation period (years)
% sales influenced to total sales
Average TI Corruption Perception Index
Average TI Global Corruption Barometer
UN Oil-for-Food dummy
Average UN Human Development Index
Characteristics of the enforcement action:
Number of respondents named
Financial misrepresentation dummy
Financial fraud dummy
Class action flag
Unique US code violations
Constant
N
R2
F
Prob > F

47

Reputation
Loss

0.0175**
0.038
0.0969*
0.099
-0.0310
0.711

0.0174**
0.042
0.0875
0.140
-0.0034
0.967

-0.0029
0.349
-0.0045
0.443
-0.0155
0.864
0.0143
0.628
0.2349*
0.100
-0.0847
0.153
0.3658
0.128

-0.0027
0.389
-0.0040
0.502
-0.0133
0.885
0.0203
0.495
0.267*
0.064
-0.0827
0.167
0.3611
0.137

0.0582***
0.000
0.0464
0.453
0.1501*
0.081
0.2912***
0.000
-0.0016
0.833
-1.2623
0.168
115
0.6667
13.20
0.000

0.0600***
0.000
0.0325
0.603
0.1413
0.103
0.2521***
0.000
-0.0022
0.782
-1.4526
0.117
115
0.6465
12.07
0.000

20
18
16
14
12
10
8
6
4
2
0
78798081828384858687888990919293949596979899000102030405060708091011
Figure 1. Bribe-related enforcement actions per year, 1978-2011

48

Table A-1. Types of charges in foreign bribery-related enforcement actions

This table tabulates the incidence of the specific charges brought in the 115 bribery-related enforcement
actions involving publicly traded corporations from 1978-2011. Panel A presents the frequency of civil
and criminal U.S. Code violations, the legal citation, common alternative reference, and description of all
charges faced by respondents in the foreign bribery-related enforcement actions. Panel B presents the
frequency of rule violations in civil and administrative proceedings under the Code of Federal Regulations
brought on respondents in the foreign bribery-related enforcement actions.
Panel A - U.S. Code violations
Criminal

51

27

15 U.S.C. 78dd-1

30A(a)(1)

Foreign bribery - by issuer (FCPA)

17

15 U.S.C. 78dd-2

30A(a)(2)

Foreign bribery - by domestic concern (FCPA)

15 U.S.C. 78dd-3

30A(a)(3)

Foreign bribery - by others (FCPA)

15 U.S.C. 78m(b)(2)(A)

13(b)(2)(A)

Books and records (FCPA)

15 U.S.C. 78m(b)(2)(B)

13(b)(2)(B)

Internal controls (FCPA)

15 U.S.C. 78m(b)(5)
15 U.S.C. 78j(b)

13(b)(5)
10(b)

Knowingly circumvent internal controls (FCPA)

Manipulative and deceptive devices - purchase or
sale in any security

6
96

34

88

28
13

11
1

Citation
FCPA provisions

Civil

Alternative

Description

15 U.S.C. 78lj(b)

21

15 U.S.C. 78m(a)

13(a)

Periodical reports - issuer

10

15 U.S.C. 78n(a)

14(a)

Proxies - solicitation

15 U.S.C. 78t(a)

20(a)

Controlling persons

15 U.S.C. 78ff
15 U.S.C. 77q(a)

17(a)

9
6

False SEC filing

Fraudulent use of interstate commerce

18 U.S.C. 2

Aiding and abetting

18 U.S.C. 287

Submitting false claims against the United States

43

18 U.S.C. 371

Conspiracy

18 U.S.C. 1001

False statements

18 U.S.C. 1002

Possession of false papers

18 U.S.C. 1341

Mail fraud

18 U.S.C. 1343

Wire fraud

18 U.S.C. 1344

Bank fraud

18 U.S.C. 1348

Securities fraud

18 U.S.C. 1349

Attempt and conspiracy

18 U.S.C. 1350

False certification of financial reports

18 U.S.C. 1952

Racketeering (use of transportation)

18 U.S.C. 1956

Racketeering (money laundering)

18 U.S.C. 1957

Racketeering (monetary transactions)

18 U.S.C. 2332d

Terrorism financial transactions

22 U.S.C. 2778

Control of arms export and import

26 U.S.C. 7206

Fraud and false tax statements

31 U.S.C. 1059

Export and import monetary instruments (CFTRA)

31 U.S.C. 1101

Export and import monetary instruments (CFTRA)

2
1

31 U.S.C. 5316
50 U.S.C. 1701

Export and import monetary instruments

Engaging in transactions with a specially-designated
global terrorist

1
4
9
1
1
2

Non-FCPA provisions

25

Registration procedure and information

49

Table A-1 (cont)

Panel B - Code of Federal Regulations (Rule) violations
Civil

Citation

Description
Falsification of accounting records (FCPA)

17 C.F.R. 240.13b2-2

Misrepresentations to auditors (FCPA)

13

17 C.F.R. 240.10b-5

Manipulative and deceptive devices - intent to defraud

17

17 C.F.R. 240.12b-20

Additional information to make statement not misleading antifraud

18

17 C.F.R. 240.13a-1

Annual reports (10-K and 10KSB)

17 C.F.R. 240.13a-11

Current reports (8-K)

14

17 C.F.R. 240.13a-13

Quarterly reports (10-Q and 10QSB)

17 C.F.R. 240.13a-14

False certification of periodic reports (SOX)

17 C.F.R. 240.14a-3

Information requirements (proxies)

17 C.F.R. 240.14a-9

False or misleading statements (proxies)

17 C.F.R. 243.100

Disclosure - general rule regarding selective disclosure

22 C.F.R. 120

Violations and penalties

22 C.F.R. 130

Political contributions, fees and commissions

31 C.F.R. 103.23

Reports of transactions of currency or monetary instruments (CFTRA)

31 C.F.R. 103.25

Reports of transactions with foreign financial agencies (CFTRA)

10

2
3
8

FCPA

17 C.F.R. 240.13b2-1

Non-FCPA

31

50

Table A-2. Non-monetary legal sanctions for bribery violations

Non-monetary legal sanctions imposed through federal sanctions relating to 115
enforcement actions for foreign bribery brought under the Foreign Corrupt Practices Act
from 1978 2011. The table presents non-monetary sanctions against all respondents in
the enforcement proceedings including pretrial agreements (deferred and nonprosecution). Only partial sanction information is presented for 24 actions (22 without
financial fraud and 2 with financial fraud) whose proceedings were ongoing as of
December 31, 2011.

# Enforcement Actions
# actions with SEC sanctions
# actions with DOJ sanctions

Actions
Actions with
without
financial
All bribery
financial
fraud
actions
fraud charges
charges
N
115
102
13
N
97
85
12
N
75
67
8

Total number of administrative and

civil sanctions
Cease and desist orders
Injunctive actions
Trading suspensions
Revocations
Officer & director bars
Accountant bars
Other bars

N
N
N
N
N
N
N

46
142
1
1
17
8
2

35
107
0
0
1
2
1

11
35
1
1
16
6
1

N
Mean
N
N
N
N
N
Mean
N
Mean
N
Mean
N
Mean
N
Mean
N
Mean

242
2.1
5
7
12
53
26
42.5
79
33.6
2
4.5
9
4.7
10
23.1
2
400

185
1.8
2
6
10
51
10
15.7
67
32.0
2
4.5
4
3.0
5
27.0
1
600

57
4.4
3
1
2
2
16
59.2
12
42.0
0
0.0
5
6.0
5
19.2
1
200

Total number of criminal sanctions,

including pretrial agreements
Sanctions
Average # criminal sanctions
Unknown sentences
Pending sentences
Awaiting trial
Pretrial agreements
Prison (months)
Probation (months)
Halfway house (months)
Home detention (months)
Supervised release (months)
Community service (hours)

51

52