We analyze security returns of banks that are implicated in the LIBOR scandal during the period from January 2011 to December 2013 and identify 39 event dates on which banks are accused of or sanctioned for manipulating LIBOR. Relying on a sample of 30 banks and a control sample of 1,262 banks from 11 countries, we capture a substantial size of reputational damage of banks upon the announcement of their involvement in the scandal. We also document a contagion effect of the reputational damage passing on from banks alleged of LIBOR manipulation to other non-alleged banks sharing the same regulatory panels. The contagion effect of the reputational damage is underscored by the association between the extent of such effect and legal enforcement of a country, highlighting and reaffirming the important role of a country’s legal enforcement and institutional setting in disciplining banking behavior.
When LIBOR Becomes LIEBOR: The Cost of Making Bankers Behave
HUAN, XING;
2015-01-01
Abstract
We analyze security returns of banks that are implicated in the LIBOR scandal during the period from January 2011 to December 2013 and identify 39 event dates on which banks are accused of or sanctioned for manipulating LIBOR. Relying on a sample of 30 banks and a control sample of 1,262 banks from 11 countries, we capture a substantial size of reputational damage of banks upon the announcement of their involvement in the scandal. We also document a contagion effect of the reputational damage passing on from banks alleged of LIBOR manipulation to other non-alleged banks sharing the same regulatory panels. The contagion effect of the reputational damage is underscored by the association between the extent of such effect and legal enforcement of a country, highlighting and reaffirming the important role of a country’s legal enforcement and institutional setting in disciplining banking behavior.
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