Jonathan M. Karpoff

• Ph.D, UCLA Economics
• Chair at University of Washington

From 1818 to 1909, 35 government and 57 privately funded expeditions sought to locate and navigate a Northwest Passage, discover the North Pole, and make other significant discoveries in Arctic regions. Most major Arctic discoveries were made by private expeditions. Most tragedies were publicly funded. Public expeditions were better funded than the...

We propose an efficiency explanation for why firms deploy takeover defenses, which we test using IPO firm data. IPO firms deploy more defenses when they have customers, suppliers, and strategic partners that are vulnerable to changes in the firm’s operating strategy. An IPO firm’s valuation and operating performance are positively related to its us...

During 2005-2007, the SEC ordered a pilot program in which one-third of the Russell 3000 were arbitrarily chosen as pilot stocks and exempted from short-sale price tests. Pilot firms’ discretionary accruals decrease during this period, and revert to pre-experiment levels when the program ends. Among firms that initiate financial misconduct before t...

We document that regulatory enforcement actions for financial misrepresentation cluster in industry-specific waves and that wave-related enforcement has information spillovers on industry peer firms. Waves and spillovers have significant effects on share prices. Early-wave target firms have the largest short-run losses in share values and the large...

Antitakeover provisions play a central role in corporate governance research. But there is little agreement over which, if any, provisions actually affect takeover likelihoods. In tests that account for the endogenous use of antitakeover provisions, we find that at most 11 of the 24 G-index provisions are negatively related to takeover likelihood....

As the U.S. Securities and Exchange Commission considers appropriate “ESG” disclosure mandates, the Financial Economist’s Roundtable contributes to the debate with a statement summarizing its policy discussion. The FER believes financial regulators should limit mandates to matters that directly affect the firm’s cash flows. Further, when issuer fil...

We document that the relation between firm value and the use of takeover defenses is positive for young firms but becomes negative as firms age. This value reversal pattern reflects specific changes in the costs and benefits of takeover defenses as firms age and arises because defenses are sticky and rarely removed. Firms can attenuate the value re...

We document that the relation between firm value and the use of takeover defenses is positive for young firms but becomes negative as firms age. This value reversal pattern reflects specific changes in the costs and benefits of takeover defenses as firms age and arises because defenses are sticky and rarely removed. Firms can attenuate the value re...

Rationales for a stakeholder model of corporate governance are based on enlightened self‐interest, moral imperative, and/or externalities. Of these, the externalities rationale holds the most promise to justify a stakeholder focus. Recent evidence, however, indicates that the benefits of a stakeholder focus are limited because the social costs of m...

Shareholder perks are in-kind gifts or purchase discounts that disproportionately reward small shareholders. Data from Japanese firms indicate that firms initiating perk programs attract individual retail shareholders and experience increases in share values. We find support for three channels by which perks increase firm value: an increase in shar...

Is financial fraud becoming a bigger or smaller problem over time? Current empirical approaches to this question generate mixed inferences. As an alternative, I use two theoretical constructs that isolate several factors that motivate fraud, and use them to consider the impact of technological and wealth changes over time. Some changes, such as an...

We propose a construct, the Trust Triangle, that highlights three primary mechanisms that provide ex post accountability for opportunistic behavior and motivate ex ante trust in economic relationships. The mechanisms are (i) a society’s legal and regulatory framework, (ii) market-based discipline and reputational capital, and (iii) culture, includi...

Financial reporting fraud and other forms of financial reporting misconduct are a significant threat to the existence and efficiency of capital markets. This study reviews the literature on financial reporting misconduct from the perspectives of law, accounting, and finance. Our goals are to establish a common language for researchers interested in...

We argue and demonstrate empirically that a firm's institutional and legal context has first-order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law's effect on a firm's takeover protection depends on (i) other state antitakeover laws, (ii) preexisting firm-level takeover defenses, and (...

Many researchers use the G-index or E-index to measure firms’ takeover defenses. Others argue that these indices are not related to firms’ takeover likelihoods. We find that, unlike their raw values, the instrumented versions of these indices are significantly and negatively related to acquisition likelihood. The difference between the raw and inst...

An extensive literature examines the causes and effects of financial misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Accounting and Auditing Enforcement Releases (AAERs). We show that the results from empirical tests can depend on which database is accessed. To examine...

We propose and test the hypothesis that takeover defenses confer costs and benefits to a firm’s shareholders that change in systematic ways as a firm matures. In particular, the cost of managerial entrenchment increases as a firm’s ownership becomes more diffuse, and the benefits of stakeholder bonding via takeover defenses decrease as a firm grows...

The Financial Economists Roundtable, a group of distinguished senior financial economists, discusses current issues and future developments in the crowdfunding market and offers suggestions regarding the regulation of the industry.

During 2005 to 2007, the SEC ordered a pilot program in which one-third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short-sale price tests. Pilot firms' discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre-experiment levels when the progra...

We summarize and synthesize the results from 67 studies that examine the consequences of shareholder activism for targeted firms, and draw two primary conclusions. First, activism that adopts some characteristics of corporate takeovers, especially significant stockholdings, is associated with improvements in share values and firm operations. Activi...

We propose and test the hypothesis that takeover defenses confer costs and benefits to a firm’s shareholders that change in systematic ways as a firm ages. In particular, the cost of managerial entrenchment increases as managerial ownership declines, and the benefits of stakeholder bonding via takeover defenses decrease, as a firm grows and diversi...

Presented at: 2015 Drexel University Conference on Corporate Governance, the 2015 Western Finance Association conference, and the 2015 European Financial Management Association conference.

The G-index and E-index are used extensively in financial research to measure firms' takeover defenses. Using instruments for a firm's use of takeover defenses based on a firm's geography and IPO cohort, we report the first direct evidence that the G-index and E-index are indeed negatively related to acquisition likelihood. The relation between tak...

We summarize and synthesize the results from 73 studies that examine the consequences of shareholder activism for targeted firms, and draw two primary conclusions. First, activism that adopts some characteristics of corporate takeovers, especially significant stockholdings, is associated with improvements in share values and firm operations. Activi...

Many researchers use the G-index and E-index to measure firms’ takeover defenses. Others argue that these indices are not related to firms’ takeover likelihoods. We develop predetermined instruments for a firm’s use of takeover defenses and report the first direct evidence that the G-index and E-index – as constituted and used in the literature – a...

Karpoff reports on a “barter trading game” in which students exchanged real goods over a period of seven weeks with different market constraints imposed each week. Student comments about the exercise were favorable.

At the 2013 Annual Symposium of the Oxford University Centre of Corporate Reputation, a roundtable was convened to discuss the reputational dynamics surrounding corporations engaged in ethical 'grey areas', where actions are likely to be deemed as being socially irresponsible and often later result in public scandal. The presenters wrote up their c...

At the 2013 Annual Symposium of the Oxford University Centre of Corporate Reputation , a roundtable was convened to discuss the reputational dynamics surrounding corporations engaged in ethical 'grey areas', where actions are likely to be deemed as being socially irresponsible and often later result in public scandal. The presenters wrote up their...

Keynote: Professor Jonathan Karpoff (University of Washington, Foster School of Business) Reputation and the Invisible Hand

Economists' models recognize the importance of reputation and the prospect of repeat contracting for contract formation and enforcement. Outside of experimental studies, however, there is little direct empirical research on the role and importance of reputation. This paper collects, describes, and synthesizes the findings of 77 empirical research p...

Researchers and investors disagree over the extent to which shareholder activism facilitates improvements in target firms’ values, earnings, operations, and governance structures. The disagreement persists despite numerous empirical studies on the topic. In this paper we survey the empirical research on shareholder activism and conclude that, despi...

What does it mean to have a ‘good’ or ‘bad’ reputation? How does it create or destroy value, or shape chances to pursue particular opportunities? Where do reputations come from? How do we measure them? How do we build and manage them? Over the last twenty years the answers to these questions have become increasingly important – and increasingly pro...

Firms prosecuted for foreign bribery experience significant costs. Their share values decline by 3.11%, on average, on the first day that news of the bribery enforcement action is reported, and by 8.98% over all announcements related to the enforcement action. Fines, internal investigation costs, and losses associated with financial restatements ac...

We document the frequent use of lockup agreements in seasoned equity offerings (SEOs), and examine the determinants of their use, duration, and early release. From 1996 through 2006, 93.8% of all SEOs included lockups, which is comparable to the 96.6% lockup rate for IPOs during the same period. The likelihood of an SEO lockup and its duration both...

More than 100 research papers that examine financial misconduct draw from one of four primary databases. We document and explain five features in each of these four databases that pose challenges for researchers in many applications. First, the dates provided by these databases lag the initial revelation of the financial misconduct by an average of...

Under Alaska's entry limitation program, transferable permits convey fishing rights. Information from permit markets is used to study several key issues regarding the behavior of fishermen and the effects of fishery management policy. I conclude that (1) expectations of future fishing incomes are the primary determinants of permit prices, (2) Alask...

CEOs who manage earnings can impose costs on shareholders. But do boards act proactively to discipline such managers, or reactively and only when the earnings manipulations lead to external consequences? Using a sample of 402 forced turnovers and 1,493 voluntary turnovers from 1992-2004, we find that the likelihood and speed of forced CEO turnover...

We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is assoc...

This paper examines whether CEOs who manage earnings tend to lose their jobs. Using a sample of 297 forced turnovers and 1,186 voluntary turnovers from 1992-2004, we find that the likelihood and speed of forced turnover are positively related to absolute abnormal accruals. The effect is most pronounced only above a threshold of "normal" accruals. U...

We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is assoc...

We examine the penalties imposed on all 585 firms that were targeted by SEC enforcement actions for financial misrepresentation from 1978 - 2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only $23.5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point...

We examine the penalties imposed on the 585 firms targeted by SEC enforcement actions for financial misrepresentation from 1978-2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only $23.5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point estimate of...

Short sellers attract a lot of attention. They are blamed for manipulating and depressing share values, and for exacerbating price declines when bad news is announced. They also are credited with improving financial markets' informational efficiency. Our project can shed light on two large questions about the net benefits of short selling to financ...

We track the fortunes of all 2,206 individuals identified as responsible parties for all 788 Securities and Exchange Commission (SEC) and Department of Justice (DOJ) enforcement actions for financial misrepresentation from January 1, 1978 through September 30, 2006. Fully 93% lose their jobs by the end of the regulatory enforcement period. Most are...

Using data from all 868 SEC and Department of Justice enforcement actions for financial misrepresentation from 1978 through June 30, 2007, we examine firm characteristics during the periods that the firms' financial statements are misrepresented. These characteristics can inform us about managers' apparent motives to misrepresent financial reports....

This paper provides the first integrated analysis of the complex mix of private and regulatory penalties for financial misrepresentation. We examine the sizes, types, and determinants of legal penalties imposed for all 697 enforcement actions initiated by the Securities and Exchange Commission for financial misrepresentation from 1978 through 2004....

Contrary to arguments that poison pills degrade firm performance, we find that operating performance modestly improves during the five-year period after pill adoption. Performance improvements are present in a wide range of firms, and are independent of adoption year and whether the firm is R&D intensive. Although recent arguments suggest that the...

Contrary to arguments that poison pills degrade firm performance, we find that operating performance modestly improves during the 5-year period after pill adoption. Performance improvements are present in a wide range of firms, and are independent of adoption year and whether the firm is R&D intensive. Although recent arguments suggest that the pro...

Using a unique panel dataset that tracks corporate board development from a firm's IPO through 10 years later, we find that: (i) board size and independence increase as firms grow and diversify over time; (ii) board size—but not board independence—reflects a tradeoff between the firm-specific benefits and costs of monitoring; and (iii) board indepe...

Many theories have been proposed to explain how corporate boards are structured. This paper groups these theories into three hypotheses and tests them empirically. We utilize a unique panel dataset that tracks corporate board development from the time of a firm's IPO through 10 years later. The data indicate that: (i) board size and independence in...

This paper examines the sizes of the fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations. Firms that violate environmental laws suffer statistically significant losses in the market value of firm equity. The losses, however, are of similar magnitudes to the legal penalties imp...

Most theoretical models of trade (Pfleiderer, 1984; Grundy and McNichols, 1989; Holthausen and Verrecchia, 1990; Kim and Verrecchia, 1991; Blume et al., 1994) imply that the trading volume prompted by a public announcement is positively related to the announcement's precision. Relying upon this notion, empirical researchers interpret high trading v...

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...

Many firms deploy takeover defenses when they go public. IPO managers tend to deploy defenses when their compensation is high, shareholdings are small, and oversight from nonmanagerial shareholders is weak. The presence of a defense is negatively related to subsequent acquisition likelihood, yet has no impact on takeover premiums for firms that are...

Many firms deploy takeover defenses when they go public. IPO managers tend to deploy defenses when their compensation is high, shareholdings are small, and oversight from nonmanagerial shareholders is weak. The presence of a defense is negatively related to subsequent acquisition likelihood, yet has no impact on takeover premiums for firms that are...

Researchers and investors disagree over the extent to which shareholder activism facilitates improvements in target firms' values, earnings, operations, and governance structures. The disagreement persists despite numerous empirical studies on the topic. In this paper I survey the recent empirical research on shareholder activism, and conclude that...

Press reports of investigations of fraud, indictments, and suspensions in military procurement are associated with significantly negative average abnormal returns in the stocks of affected firms. Abnormal stock returns are significantly less negative, however, for firms ranking among the top 100 defense contractors than for unranked contractors, ev...

Fraud scandals can create incentives to change managers in an attempt to improve the firm's performance, recover lost reputational capital, or limit the firm's exposure to liabilities that arise from the fraud. It also is possible that the revelation of fraud creates incentives to change the composition of the firm's board, to improve the external...

We examine several theoretical and empirical issues concerning punitive damage awards and their importance to business. First, we argue that previous justifications of punitive damage awards ignore the role of private contracting and reputation in assuring contractual performance. In the absence of externalities, punitive awards are not necessary t...

Press reports of military procurement fraud investigations, indictments, and suspensions are associated with significantly negative average abnormal returns in the stocks of affected firms. Abnormal stock returns are significantly less negative, however, for firms ranking among the Top 100 defense contractors than for unranked contractors, even aft...

From 1818 to 1909, 35 government and 57 privately funded expeditions sought to locate and navigate a Northwest Passage, discover the North Pole, and make other significant discoveries in Arctic regions. Most major Arctic discoveries were made by private expeditions. Most tragedies were publicly funded. Public expeditions were better funded than the...

We document a large and broad-based increase in the use of corporate governance provisions in the late 1980s. As a result, most large publicly traded firms have complex governance structures. This violates an assumption implicit in many empirical studies that provision use is mutually independent. While overall provision use is not systematically r...

Anecdotal evidence suggests that top managers of firms that are investigated or charged with criminal fraud lose their jobs. From a theoretical perspective, it is plausible that fraud scandals create incentives to change managers, in an attempt to improve the firm's performance, reinvest in lost reputational capital, or limit the firm's exposure to...

This paper examines the sizes and determinants of fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental laws. We find that legal penalties are not significantly related to firm size, indicating no support for views that large companies face unusually small legal penalties. In fact, we can e...

This is the first book to use economic theory in the analysis of all the different aspects of organised crime: the origins, the internal organisation, market behaviour and deterrence policies. The theory of rent-seeking is adopted to help understand the origin of criminal organisations from a state of anarchy, while modern industrial organisation t...

Shareholder-initiated proxy proposals on corporate governance issues became popular in the late 1980s as corporate takeover activity declined. We find firms attracting governance proposals have poor prior performance, as measured by the market-to-book ratio, operating return, and sales growth. There is little evidence that operating returns improve...

Proponents of state antitakeover legislation argue that previous empirical tests by financial economists of the wealth effects of Pennsylvania's 1990 antitakeover law are biased. We show that the proponents are correct. In particular, firm size, event-time clustering, and non-synchronous trading effects account for the wealth decreases reported in...

We find that evidence of a positive stock price reaction to the announcement of a name change is very weak and is sensitive to sample selection. We interpret the evidence as a caution against the popular opinion that corporate name changes have significant valuation effects. We also find little evidence that corporate name changes correspond to cha...

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The 13 regional corporations established by the Alaska Native Claims Settlement Act of 1971 (ANCSA) historically have performed poorly. The illusory appearance of improved performance during the latter 1980s resulted from a temporary tax loophole and accounting conventions for undeveloped land. The firms have performed poorly primarily because of A...

On average, insiders are net sellers of their firms' common stock for several months before announcements of new common stock and convertible debt issues. There is no evidence of abnormal insider trading before announcements of straight debt issues. These results suggest that the prospect of legal and market penalties does not deter a significant a...

We examine the importance of dividend-capture trading in NASDAQ stocks by testing for cross-sectional relations between ex-day abnormal returns and bid-ask spreads. Throughout, we find that ex-day returns and spreads are positively related. The relation increases across dividend-yield quintiles and is strongest in high-yield stocks. The relation do...

Forecasts are an inherent part of economic science and the quest for perfect foresight occupies economists and researchers in multiple fields. The release of economic forecasts (and its revisions) is a popular and often publicized event, with a multitude of institutions and think-tanks devoted almost exclusively to that task. The European Central B...