Do corporate violations and fines have a predictable impact on stock price? In this newsletter, we take a closer look at the data.
Analysis: Corporate Misconduct and Fines
Every year, U.S. government agencies impose billions of dollars in fines on publicly-traded companies to penalize corporate wrongdoing. The graph below shows companies that have received fines over the last two years (sized based on market cap, and colored based on the severity of the fine).
These fine announcements can be a shock event, and often cause an immediate market sell-off. However, recent research has shown that this initial shock is typically an overreaction, and that companies receiving fines are likely to outperform the market in the following months.
That isn't always true. While corporate fines are often one-time penalties that amount to little more than a "dividend check lost in the mail", they are occasionally symptoms of deep underlying problems that will plague or even doom a business.
To better understand how to discriminate between these two possibilities, we analyzed some of the largest corporate fines from the last two years and the short- and long-term market reaction surrounding their announcement.
We looked at fines that fell into five different categories: privacy violations, False Claims Act violations, Controlled Substance Act violations, environmental violations, and consumer protection violations. Within each of these categories, we charted abnormal returns (a company's stock return minus the market's return) surrounding fine announcements to see if there were clear patterns in price movement.
False Claims Act Violations
More than any other type of misconduct, False Claims Act violations seem to be associated with systematic problems with a company's business model. Fine announcements in this category have often been followed by several months of consistent underperformance.
Novartis (NVS) - $678 Million
On July 1, 2020, Novartis Pharmaceuticals Corporation agreed to pay a $678 million fine to resolve a case in which the drug-maker was accused of paying kickbacks to thousands of doctors to entice them to prescribe its medicines. In the week after the fine was announced, NVS stock fell by only 1%. However, in the following months it has risen by only 2%, far underperforming the market.
Walgreens Boots Alliance (WBA) - $269 Million
On January 22, 2019, Walgreens Boots Alliance Inc. agreed to pay $269 million to settle two lawsuits accusing it of civil fraud for overbilling federal healthcare programs over a decade. In the week after the fine was announced, WBA stock fell by 0.1%; and it continued to decline by about 22% over the next year.
Conduent State Healthcare (CNDT) - $236 Million
On February 19, 2019, Conduent State Healthcare entered into a $236 million settlement with the state of Texas regarding Medicaid-related fraud claims. In the week after the fine was announced, CNDT stock rose by 2%; but it fell by 94% over the next year.
Privacy Violations
While there have been several large fines in this category, they typically don't represent a threat to the company's underlying business model. Facebook, Equifax, and Google all outperformed the market after being fined for privacy violations, partially due to tailwinds in Big Tech/Data valuations over the last two years.
Facebook (FB) - $5 Billion
On July 24, 2019, the FTC imposed a record-breaking $5 billion fine on Facebook for violating a 2012 order by deceiving users about their ability to control the privacy of their personal information. In the week after the fine was announced, FB stock dropped 4%; but it rose 21% over the next year.
Equifax (EFX) - $700 Million
On July 22, 2019, Equifax agreed to pay up to $700 million as part of a global settlement with the FTC, the CFPB, and 50 U.S. states and territories in response to the 2017 data breach which affected 147 million people. In the week after the fine was announced, EFX stock rose by 1%; and it continued to climb by 27% over the next year.
Google (GOOG) - $170 Million
On September 4, 2019, the FTC imposed a $170 million fine on Google LLC and its subsidiary YouTube to settle allegations that YouTube illegally collected personal information from children without parental consent. In the week after the fine was announced, GOOG stock rose by 3% and continued to climb over the next year by 39%.
Controlled Substances Act Violations
Mallinckrodt (MNK) - $1.6 Billion
On February 25, 2020, Mallinckrodt agreed to pay $1.6 billion to settle thousands of opioid-related lawsuits. In the week after the fine was announced, MNK stock fell by 37%; and is now down over 95% and trading for pennies.
Teva Pharmaceuticals (TEVA) - $85 Million
On May 26, 2019, Teva Pharmaceuticals agreed to pay the state of Oklahoma $85 million to settle claims that it played a part in the state’s opioid crisis. In the week after the fine was announced, TEVA stock fell by 22%; but it rose by 33% over the next year.
McKesson Corporation (MCK) - $37 Million
On May 2, 2019, McKesson Corporation agreed to pay the state of West Virginia $37 million to settle claims that it shipped approximately 100 million doses of addictive opioids to state residents over a six-year period. In the week after the fine was announced, MCK stock rose by 9%; and it continued to rise by 20% over the next year.
Environmental Violations
Fiat Chrysler (FCAU) - $800 Million
On January 10, 2019, Fiat Chrysler Automobiles N.V. agreed to an $800 million settlement to resolve claims that it used illegal software to produce false results on diesel emission tests. In the week after the fine was announced, FCAU stock rose by 5%; and it continued to rise by about 7% over the next year.
Dow Chemical Company (DOW) - $77 Million
On November 8, 2019, Dow Chemical Company agreed to pay $77 million to settle claims that hazardous substances were released over decades in natural wildlife areas in Michigan. In the week after the fine was announced, DOW stock fell by 2%; but it rose by about 10% over the next year.
Consumer Protection Violations
Pacific Gas & Electric (PCG) - $1 Billion
On June 19, 2019, Pacific Gas & Electric agreed to pay a $1 billion fine to California authorities for wildfire damage. In the week after the fine was announced, PCG stock rose 7%; and it rose by 5% over the next year.
Santander Consumer USA (SC) - $550 Million
On May 19, 2020, Santander Consumer USA Inc. agreed to pay a $550 million fine in response to charges of predatory auto lending to low-income borrowers. In the week after the fine was announced, SC stock rose 8%; and it rose by 49% in the months to date.
Summary
Looking at a small sample of corporate fines from the last two years, we found that there is no single rule for how stock prices will react to fine announcements, in the short-term or the long-term.
However, there appear to be strong trends among fines within certain categories. The most clear pattern is consistent long-term underperformance among companies fined under the False Claims Act.
Stay on top of this data with our corporate fines dashboard, and easily keep track of fine announcements and violations that may have flown under the market's radar.
