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FCPA plus fraud charges clobber market cap

A study of FCPA enforcement conducted by the Searle Civil Justice Institute, a research division of The Law & Economics Center at George Mason University Law School, found public companies lost an average of 2.9 percent of market capitalization as a result of an FCPA investigation.

Companies charged with bribery alone suffered an initial 1.5 percent loss, while those charged with bribery and financial fraud saw a initial drop of 16.3 percent in market cap, the Wall Street Journal reported Monday.

Fraud was defined for the study as the statutory violation of the 1934 Securities Exchange Act.

Over a longer period, the difference was more pronounced: Companies facing FCPA enforcement dropped a cumulative average of 2.7 percent in value, whereas the companies facing both FCPA and fraud charges dropped a total average of 54.9 percent, the study found.

The trend holds across industries, it found.

The reduction in value for firms targeted by FCPA bribery actions involving no fraud is explained by direct costs such as fines, internal investigations or monitors, the study found. But when the enforcement actions that include fraud charges, the targeted companies also suffer large reputational losses, the study said.

The study looked at 139 FCPA enforcement actions launched against public companies that took place between the law’s passage in 1977 through April 2013.

It examined 136 of those cases on the question of market-cap value, finding all but 13 involved only bribery charges, but those companies saw far greater losses than the others.

The Searle Civil Justice Institute’s study on FCPA enforcement and its effects on corporate valuation can be found here.

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Julie DiMauro is the executive editor of FCPA Blog and can be reached here.

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