Market supervisor monetary penalties for non‐compliance with informational requirements: Do investors care?

Abstract

This study measures and differentiates investors' responses to market supervisors' monetary penalties for non‐compliance with informational requirements for the capital market in Poland, broken down by the type of distorted information and the form of a breach. An event study was conducted to measure the information content of monetary penalties. We used a market model and tested the significance of abnormal daily returns using both parametric and non‐parametric tests. Cross‐sectional analyses were conducted to measure the determinants of market reactions. We employed two novel classifications of non‐compliance: by the type of distorted information (financial reporting information and other information) and by the form of a breach (failing to provide information and providing erroneous information). We contribute to the literature by finding that investors react negatively to monetary penalties imposed on companies for non‐compliance with financial reporting information requirements, whereas they do not react to such penalties for non‐compliance with other information requirements. We incorporate original variables that explain the magnitude of the market reaction and find that (i) the longer the distance between the breach and penalty imposition, the weaker the market reaction, and (ii) the greater the monetary penalty, the stronger the market reaction. We also find that both forms of breach lead to similar negative market reactions.