Does the Market Like CEO Convictions?

Its been over a week since I last looked at the stock market reaction to important legal news, so I can't resist another go around. Today's topic-- how does the market respond to the conviction, or lack thereof of CEOs for allegedly fraudulent behavior. Presumably, any conviction, or failure to convict, sends a signal to executives and the stock market about the likelihood of winding up in jail for certain behavior. In theory, convictions of CEOs for bad behavior could raise or lower stock prices. Prices of stocks should go up if the increase in probability of conviction for bad behavior lowers the risk of faulty and inefficient bookkeeping or other scams. The price of stocks would fall, however, if  fear of prison deterred executives from taking ex-ante efficient risks that might look criminal ex-post. And of course, higher or lower risk of prison for executives might also be irrelevant, or impossible to disetangle from the everthing else that moves markets.   

Today, Jeff Skilling and Kenneth Lay were convicted at around noon-- I'm betting a little before noon, though I can't be sure. The S &P 500 was up 1.14% for the day. Any number of things could be causing this increase. Between 11:00 and 1:00 today, a window that allows us to focus more directly on the Enron effect, the S&P was up .32%.

We can't draw any conclusions from one event, so lets look at another. When Richard Scrushy was acquitted on June 28, 2005, the market received the opposite type of signal, that the "I didn't know" defense by CEOs might work in some cases.  Contrary to the thesis that higher risk of CEO conviction is good for value, however, the S&P 500 actually rose .8% on the day of the acquittal.

With only two data points, unobservables can easily swamp any effect, so its premature to make any conclusions such as "the market doesn't care". To make this study complete, we should get many more examples of convictions and acquittals and examine the market consequences on average, which would allow us to get much more precise and statistically significant results. This mini-study, however, uncovers no consistent stock market response to news of CEO convictions and acquittals. Oh well.