Research papers

When do Foreign Regulatory Interventions Trigger Market Disciplinary Effects? Evidence from Anti-Money Laundering Violations (Andrea Schertler and Sandra Tillema)

Corporate misconduct can be costly to companies, partly because of the disciplinary actions taken by market participants. As previous studies in this field have often concentrated on violations of domestic regulations, our understanding of market disciplinary effects in the context of multinational companies is limited. To fill this void, we analyze the role of institutional investors in situations in which international banks violate foreign and domestic anti-money laundering (AML) rules. Although it may be more difficult for market participants to collect and process information about misconduct in foreign countries, we find strong support for the conjecture that institutional investors exit their holdings when they learn that a particular bank is involved in a foreign regulatory intervention. We further find that the amount of institutional holdings negatively influences the responses of stock prices to regulatory interventions irrespective of whether the concern is over foreign or domestic interventions. Finally, we find that after news about foreign interventions has been released, the likelihood of a forced CEO turnover increases with the percentage of institutional holdings. The size and direction of the disciplinary effects that we find for foreign interventions resemble those for domestic interventions. Based on our study, we strongly suggest that future research into misconduct must consider information on foreign malpractices, as ignoring this information produces biased results.

Journal of International Financial Markets, Institutions & Money, 2026. 

 

Regulation and the Pricing of Corporate Misconduct 
(Andrea Schertler and Johanna Stauder)

How does regulation reshape how investors price banks’ exposure to misconduct? We study this question using the Fourth Anti-Money Laundering Directive (AMLD4) of the European Union. Event-study evidence shows that investors priced AMLD4 during the legislative process, with stronger reactions for banking groups with greater organizational exposure through subsidiaries. Using a difference-in-differences design, we find that money laundering (ML) incidents trigger significantly more negative abnormal returns following AMLD4 than non-ML incidents. This effect is robust to placebo tests, matching, and sample restrictions. Consistent with the focus of AMLD4, the market response is strongest for subsidiaries in ML-prone jurisdictions. Mechanism tests point to information-based and cash-flow channels: ML incidents at subsidiaries reduce management trust and attract greater investor attention, while the relative frequency of ML incidents increases, consistent with greater remediation exposure. Overall, our findings indicate that regulation reshapes investors’ assessment of both managerial quality and underlying exposure to ML risk.

 

 

Same News, Different Medium: Social Media Induced Uncertainty and Investors' Response To Governance Incidents
(Andrea Schertler and Florian Stöckler)

Does the uncertainty conveyed by social media amplify investors' response to banks' corporate governance incidents?  For an international sample of banks, we match posts from three major financial news outlets with their associated full-length articles in the week preceding each incident, and construct linguistic uncertainty measures using a large language model. Tweet uncertainty is significantly associated with a more negative three-day cumulative abnormal return, while article uncertainty is not; investors respond to hedging language in posts but to sentiment in articles. Channel analysis shows that the effect is attenuated by broader tweet coverage, consistent with more posts introducing clarifying information, and amplified by the reach of the incident. Bank fundamentals do not moderate it.  These findings suggest that social media format, rather than its informational content, independently amplifies the market response to governance-related uncertainty.

 

Realized and Perceived Money Laundering Risk: International Exposure and Bank Crash Risk 
(Amal Alabbad and Andrea Schertler)

This study examines whether the public revelation of money laundering (ML) incidents elevates stock price crash risk in the banking sector. Drawing on a sample of 21,925 bank-year observations spanning 82 countries over the period 2006–2024, we employ a two-way fixed effects framework alongside difference-in-differences and instrumental variable strategies to establish a causal link between ML incident disclosure and banks' future stock price crash risk. Our baseline results confirm that ML incident revelation is associated with a significant increase in subsequent crash risk, consistent with the bad news hoarding framework in which compliance failures and regulatory exposure accumulate as concealed negative information before triggering abrupt price corrections. We further identify two complementary cross-border transmission channels through which ML-related risks propagate. The perceived exposure channel shows that banks with ties to ML-prone jurisdictions face amplified crash risk even absent a direct subsidiary incident, while the realized subsidiary shock channel shows that actual ML incidents at foreign subsidiaries propagate to parent banks through informational, financial,  and operational linkages, an effect that intensifies with the parent’s own ties to ML-prone jurisdictions. Robustness tests confirm the two channels operate independently. 

 

 

When Compliance Fails, the Conversation Changes 
(Niels Hermes, Sasan Mansouri, Andrea Schertler, David Windisch)

Banks are opaque, and governance failures---compliance breakdowns, control lapses, regulatory sanctions---strike at precisely what makes them hard to value. We study how bank managers talk about these failures on quarterly earnings calls, and whether the way they talk moves markets. Linking U.S. bank earnings-call transcripts to RepRisk governance-incident data, we use multinomial inverse regression to learn, directly from the calls, the vocabulary managers adopt after incidents, holding bank and time fixed so the measure captures how a given bank changes its language, not which banks have incidents. Two registers emerge: a capital-and-credit-risk register that engages the failure directly, and a routine lending register that proceeds as if nothing had happened. Conditional on facing an incident, leaning into the capital register reduces abnormal trading volume and return volatility, resolving disagreement and uncertainty, and increases abnormal returns. We also demonstrate that the informational value of governance-related language depends on the speaker: trading volume, abnormal returns, and analysts' forecast dispersion and coverage respond to the CFO's, but not the CEO's, use of incident-related language. The effect survives granular board-governance and CEO controls and are supported in placebo tests. After compliance fails, what managers say, and how concretely they say it, shapes how markets absorb the shock.