Corporate scandals, capital structure and contagion effect

A wave of corporate scandals has recently hit the market reviving attention on the effects of these events on shareholders' value, corporate governance and stock market reaction. The documented far-reaching e¤ects of corporate scandals on security prices may have a market timing value that managers may be willing to exploit. In this paper we analyze whether companies involved in a security class action do exhibit di¤erential capital structure decisions and if the information revealed by a corporate scandal a¤ects security issuances by industry peers. Our findings show that before a SCAS is filed, companies engaged in a scandal had a higher number of security offerings and due equity mispricing they were more likely to use equity as a financing mechanism. Following the SCAS filing they also exhibit decreasing book and market leverage. Finally we observe signi…cant contagion e¤ects on industry peers. These result suggest that investors tend to process company-specific news as a more industry-wide information.