Reputational risk on corporate corruption scandals: evidence from Latin America

Abstract

PurposeThis paper evaluates how corruption scandals effects corporate reputational risk in main representatives Latin America listed companies. Efficient market hypothesis (EMH) on Standard and Poor’s index is also tried on.Design/methodology/approachFirst it is run a standard event study to evaluate the negative impact of such corruption episodes in terms of abnormal returns (ARs) and cumulative negative abnormal returns (CARs). Secondly, we use the operational loss derived from the corruption scandal divided by the stock's market capitalization (Loss Ratio) to estimate the reputational abnormal returns (RepARs) and its cumulative measure (RepCAR).FindingsIt is found that corporate reputation (CR) does not affect the stock market performance of the companies involved in the corruptions events, at least, in the very short term. The results show positives RepCARs due to still unknown losses of relative size of corruption after the announcement of the scandal, when the market shows greater sensitiveness.Practical implicationsThe behavior of the market on corruption scandals on the Latin American can let explore other options to limit bribery, and the study of this with a perspective of EMH is the significance of this paper.Social implicationsCorruption become major problems in recent years in Latin American and its implications on the stakeholders.Originality/valueObserving in the existing literature, there is no many studies based on the corruption scandals and market price using event methodology.