Is 'Not Guilty' the Same as 'Innocent'? Evidence from SEC Financial Fraud Investigations

When the Securities and Exchange Commission (SEC) investigates firms for financial fraud, investors only learn about the investigation if managers disclose it, or regulators sanction the firm. We investigate the effects of such disclosures using confidential records on all investigations, regardless of outcome. Even when no charges are brought, firms that voluntarily disclose an investigation underperform non-disclosing firms by 11.7% over the following year. Disclosure is associated with a higher chance of shareholder class action lawsuits, and more prominent disclosures are associated with worse returns. CEOs who disclose an investigation are 14% more likely to experience turnover. Our results are consistent with transparency about bad news being punished by financial and labor markets