October 1, 2018 | Article

Using recent U.S. public data, Vega analyzed how the announcement of a plea agreement has historically affected a company’s stock returns. We performed an empirical analysis of the impact of announcements of plea agreements on stock market returns using an “event study” approach.

To identify affected companies, we used a database that contains information relating to federal criminal cases brought against organizations, including companies traded on U.S. stock exchanges. The event of interest in our study is the announcement of a company agreeing to a plea deal in connection with charges brought by the U.S. Department of Justice. We then compiled stock price data for the affected companies, from Yahoo Finance and Alpha Vantage, one year preceding and one year following the announcement of a plea event.

We also incorporate a market index into an event study. Doing so helps one to accurately identify the reason for a change in the stock price. If, for example, it was observed that a company’s stock returns went down during the time frame, such a change could be because the market reacted to the event negatively, but it could also be because the broader market went down for other reasons. In order to isolate the impact of the event, it is important to identify the changes in stock returns due to the average market effect.

Using the event study approach, we consistently found that the overall effect of a plea agreement was for stock returns to respond positively.

 Analysis of Market’s Reaction to Plea Agreements