Solomon & Soltes on Disclosure of Securities Fraud Investigations

David H. Solomon and Eugene F. Soltes have posted Is 'Not Guilty' the Same as 'Innocent'? Evidence from SEC Financial Fraud Investigations on SSRN with the following abstract:

The Securities and Exchange Commission (SEC) routinely investigates firms for financial fraud, but investors only learn about regulators’ concerns if managers voluntarily disclose news of the investigation, or regulators sanction the firm. We investigate the effects of disclosing investigations using confidential records on all opened investigations, regardless of outcome. Markets exhibit some ability to identify which investigations will eventually lead to sanctions. Nonetheless, even when no charges are ultimately brought, firms that voluntarily disclose an investigation have significant negative returns, underperforming non-sanctioned firms that stayed silent by 12.7% for a year after the investigation begins. Consistent with limited investor attention, disclosing in a more prominent manner is associated with worse returns. CEOs who disclose an investigation are also 14% more likely to experience turnover. Our results are consistent with transparency about bad news being punished, rather than rewarded, by financial and labor markets.