Forgive me all my sins: How penalties imposed on banks travel through markets

Christian Flore*, Hans Degryse, Sascha Kolaric, Dirk Schiereck

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


From 2005 to 2015, the 25 largest global financial institutions paid combined more than $285 billion in legal penalties. We examine the reaction of banks' stocks, bonds, and credit default swaps to the announcements of monetary penalties. We observe a reduced default risk and lower financing costs, as well an increase in the stock market valuation, suggesting that banks benefit from settling lawsuits. The positive reaction is likely driven by the resolution of uncertainty surrounding these proceedings. While the sued bank's systemic risk increases in the size of the relative monetary penalty, we also document positive spillover effects to other banks facing pending lawsuits with the same plaintiff, demonstrating the systemic effect of law enforcement against banks. Furthermore, banks appear to correctly anticipate penalties, as they are cash flow-effective but not income-effective in the year they are announced.
Original languageEnglish
JournalJournal of Corporate Finance
Early online date23 Feb 2021
Publication statusPublished - Jun 2021


  • banks
  • lawsuits
  • settlements
  • legal fines
  • financial markets


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