Does Conviction Matter? The Reputational and Collateral Effects of Corporate Crime

Critics of deferred prosecution agreements claim they undermine deterrence by lowering the cost to firms from reputational damage or stigma resulting from a criminal settlement. We evaluate whether the choice between a DPA and a guilty plea affects the cost to corporations of reputational damage arising from the reactions of interested outsiders – e.g., customers and suppliers – to the settlement, holding constant other factors such as the offender and offense magnitude. We introduce a framework for this purpose in which differences in the qualitative information that is released at settlement may cause differences in outsider reaction and, thus, the firm's cost of reputational damage. We review the contents of the DPA and plea agreements and find no differences in the information they directly convey to interested outsiders that would cause differences in the expected cost of reputational damage to the firm. We then identify three channels through which the choice of settlement form might indirectly signal information to outsiders: direct revelation, prosecutorial selection, and managerial selection. The differences in the information that interested outsiders may receive through these channels according to the form of settlement appear unlikely to cause differences in the expected costs of reputational damage between DPA and plea to firms at settlement, however. We then turn to the impact of DPAs on the ability of federal agencies acting as interested outsiders to protect their interests by excluding or delicensing a firm whose criminal settlement reveals that it presents an enhanced risk of causing future harm to the agencies' interests that is best addressed by exclusion instead of by mandated reforms. We conclude that agencies may be better able to serve their interests as interested outsiders when prosecutors employ DPAs than pleas because DPAs leave many agencies free to use permissive exclusion and enable them to exclude when, but only when, appropriate