The Effect of Deferred Prosecution Agreements on Firm Performance

Abstract

The recent increase in the use of deferred and non-prosecution agreements (DPAs) by government agencies as a mechanism to hold a firm accountable for having engaged in wrongdoing and to reform the firm’s practices has given rise to a vigorous debate regarding the merits and drawbacks of such arrangements, compared with the alternative of prosecuting these firms. We find that firms subject to DPAs experience significantly lower buy and hold returns in the one- to three-year period following the DPA compared with prosecuted firms. These results are consistent with shareholders experiencing a wealth loss when a firm enters into a DPA. We also show that DPA firms experience negative real consequences following the initiation of a DPA, relative to prosecuted firms, as measured by decreases in both sales and the number of employees. These results are inconsistent with the idea that DPAs reduce the collateral damage to stakeholders who are not responsible for the crimes committed by the organization (i.e., innocent parties).