News Release

Mixed signals from the SEC and DOJ make investors more likely to stay with corrupt businesses

Investors’ decision-making process may not be impacted by a company’s violation and resulting penalty, study finds

Peer-Reviewed Publication


Amsterdam, November 10, 2021 Recent years have seen an increased enforcement of the Foreign Corruption Practices Act (FCPA), which prevents U.S. companies and foreign firms with U.S. investments or operations from engaging in bribery. The aim of the act was to discourage corrupt behavior and result in better informed investors, but its uneven implementation by the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) has been anything but ideal.

A new study in Advances in Accounting, published by Elsevier, looks at how a mismatch in the severity of the FCPA violation and subsequent penalty leads to market underreaction and uncertainty.

Previous literature has shown that the SEC and DOJ have trouble estimating the actual benefit received by the violating company, leading to them levying a penalty that might not be commensurate to the offence. Regardless of how severe the violation, companies that self-report, cooperate, or accept responsibility are more likely to get a lower penalty.

But how do investors respond to a disparity between the severity of the violation and the imposed penalty?

That was the question Dr. Wioleta Olczak, an Assistant Professor at Marquette University, USA, sought to answer in her work.

“Investors’ decision-making might not be impacted when a company’s FCPA violation and severity mismatch because investors experience ambiguity in assessing the two mismatching disclosures and give the company the benefit of the doubt,” says Dr. Olczak. This leads to a lower company risk assessment by the investors and increases the probability of them staying with their investment.

Dr. Olczak recruited participants with several years of experience in personal investments and randomly assigned them to four situations based on a combination of violation severity (high/low) and penalty levied (high/low). She then analyzed their responses and found that investors were more likely to divest when the company’s FCPA violation severity and penalty match (high-to-high and low-to-low) and vice-versa.

When investors are given ambiguous information (like when a severe violation is given a low penalty) they develop ‘investor overconfidence.’ They start to ignore ambiguous signals and believe they have already considered all the factors in play, which ultimately causes market underreaction. This kind of mismatch could also potentially undermine the SEC and DOJ’s credibility.

A core concept used in the study was signaling theory, which states that consistent signals improve the legitimacy of those who are communicating information and enhance the trustworthiness of the information received.

“The SEC and DOJ want to deter companies from violating the FCPA, but companies might not be affected when the SEC and DOJ create ambiguous circumstances. They should be cautious in evaluating and imposing penalty amounts that are significantly different from the violation severity,” stresses Dr. Olczak.

The findings of the study are limited by the lack of specific experiments to address the differences between investments in individual shares of stock and mutual funds. The study also looked at investor decisions for only a short period of time, whereas real life FCPA violations can take years to investigate. Nevertheless, the ethical and practical implications of the study cannot be ignored. Moreover, these findings can further be generalized to other controversial policies or ethical issues, such as environmental protection and human rights.

At a time when trust between regulatory bodies and the public is at an all-time low, it is crucial to re-evaluate the signals being sent by the former. FCPA penalties are just a start.


Notes for editors
The article is "The foreign corrupt practices act: How investors respond when violation severity and corresponding penalty (mis)match," by Wioleta Olczak ( It appears in Advances in Accounting, volume 54, (September, 2021), published by Elsevier.

Copies of this paper are available to credentialed journalists upon request, please contact the Elsevier Newsroom at Journalists wishing to interview the author can contact Wioleta Olczak at


About Advances in Accounting
Advances in Accounting publishes original research on accounting on a variety of topics and research methods with the aim of advancing our understanding of accounting. Financial and managerial accounting, taxation, auditing, government and nonprofit accounting, social and environmental accounting, accounting information systems, forensics and public policy are the journal’s main areas of focus. Research published in the journal must show an original demanding analysis of key issues of the field.


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Elsevier Communications

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