The Cost of Business Mistakes : Consumption Response to Corporate Penalties

Using transaction-level credit card spending from a leading Chinese commercial bank, we show that consumers reduce their consumption by 34% immediately after the publicity of penalties on a firm. The same consumers do not reduce consumption of non-punished firms, nor do consumers who do not have a prior consumption record on punished firms. Additionally, we find significant substitution effects to non-punished firms whose Merchant Category Codes match those of punished firms. This negative consumer response results in a 57% decrease in spending on punished firms. We also find significant post-penalty period costs to firms in terms of reduced profits and negative Cumulative Abnormal Returns