Corporate (Alleged) Wrongdoings, Settlements, and Restitution: The Story of When Two Wrongs Make One Right

ABSTRACT U.S. securities authorities can cease civil and criminal investigations using settlements as a resolution vehicle instead of bringing firms to trial. This study analyzes reputational and economic penalties in securities value when a settlement negotiation fine is paid as restitution toward specific victims. Using 176 AAER settlement cases between 2007 and 2016, the findings suggest that when restitution is paid to shareholders, it positively impacts securities’ values. In the seven-day window (−3,3), results indicate that the impact of the restitution paid to victims on the stock price offsets up to 80 percent of the loss in share value. In the 17-day window (−8,8), the effect of victims’ restitution offsets valuation losses from the announcement. This effect is absent in the 17-day window (−8,8) when fines are paid to the public interest. The findings suggest compensating victims allows a fuller recovery of reputational and economic losses in securities value.