When private information becomes fraud: evidence from Euronext Paris

Abstract

This paper analyzes the financial and corporate governance characteristics of firms sanctioned for insider trading and disclosure irregularities on Euronext Paris between 2010 and 2022. We identify criteria that separate fraudulent firms from their peers and show that cash flow volatility and the absence of analyst coverage increase the likelihood of sanctions by the French market authority. Founder CEOs, family board chairs, and dual chair/CEOs are also more likely to be sanctioned for financial market abuses. However, we find that the level of family ownership does not affect the likelihood of sanctions, suggesting that top insiders are willing to extract private benefits at the expense of the company’s long-term performance. Our results also indicate that most fraud firms get delisted within a few years of their sanction announcement. Although most surviving companies still have a dual family chair/CEO after their sanction, they include independent board members as recommended by the two French governance codes. Last, this study investigates whether sanctioned companies rely on earning management techniques such as income smoothing to hide their real performance from market participants. Our results show that sanctioned firms are actually less likely to use income smoothing activities. In addition, we find that financial analysts play a mixed role in improving public information disclosure. Although analyst coverage reduces the likelihood of sanctions and earnings smoothing activities, larger pools of analysts are also associated with a greater probability of sanction in family-controlled firms, suggesting that analysts tend to herd and fail to detect fraudulent activities.