Industry informational interactions and corporate fraud

Tracy Yue Wang; Andrew Winton

doi:10.1016/j.jcorpfin.2021.102024

Industry informational interactions and corporate fraud

Tracy Yue Wang, Andrew Winton

Finance

Research output: Contribution to journal › Article › peer-review

12 Scopus citations

Abstract

We examine three information channels through which product market interactions in an industry can affect firms' incentives to misreport financial information to investors. We find that lower product market sensitivity to individual firms' information and greater use of relative performance evaluation encourage the commission of financial fraud. Industry structures that give rise to less collection of information about individual firms decrease the probability of fraud detection and increase the probability of fraud commission. We also examine dynamic effects of fraud. Our results suggest that, in fragmented industries, fraud can amplify cyclical fluctuations in the real economy.

Original language	English (US)
Article number	102024
Journal	Journal of Corporate Finance
Volume	69
DOIs	https://doi.org/10.1016/j.jcorpfin.2021.102024
State	Published - Aug 1 2021

Bibliographical note

Funding Information:
Earlier versions of this paper were circulated under the title, “Competition and Corporate Fraud Waves.” We are grateful for comments from Andrew Call, Douglas Cumming, Nishant Dass, Raquel Gaspar, Eitan Goldman, Gerard Hoberg, and Jonathan Karpoff, and especially to our discussant, Mads Borelli-Kjaer, an anonymous referee, and the editor. We also thank seminar and conference participants at the University of Minnesota, the Shanghai Advanced Institute for Finance, the Stockholm School of Economics, the European School of Management and Technology, University of Nottingham, Texas A&M University, Southern Methodist University, Georgia State University, Boston College, IDC Herzliya, Tel Aviv University, Universitat Pompeu Fabra, 2011 Financial Intermediation Research Society Conference, 2011 European Finance Association Annual Meeting, the CFA-FAJ-Schulich Conference on Fraud, Ethics and Regulation, 2012 Conference on Empirical Legal Studies, 2012 Conference on Financial Economics and Accounting, 2013 American Economics Association Annual Meeting, 2013 European Winter Finance Summit, and 2020 FAU/Journal of Corporate Finance Conference Conference on “Corporate Failure: Decline, Collapse and Scandal”.

Publisher Copyright:
© 2021 Elsevier B.V.

Keywords

Boom
Bust
Corporate securities fraud
Misreporting
Product market interaction
Relative performance evaluation

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10.1016/j.jcorpfin.2021.102024

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title = "Industry informational interactions and corporate fraud",

abstract = "We examine three information channels through which product market interactions in an industry can affect firms' incentives to misreport financial information to investors. We find that lower product market sensitivity to individual firms' information and greater use of relative performance evaluation encourage the commission of financial fraud. Industry structures that give rise to less collection of information about individual firms decrease the probability of fraud detection and increase the probability of fraud commission. We also examine dynamic effects of fraud. Our results suggest that, in fragmented industries, fraud can amplify cyclical fluctuations in the real economy.",

keywords = "Boom, Bust, Corporate securities fraud, Misreporting, Product market interaction, Relative performance evaluation",

author = "Wang, {Tracy Yue} and Andrew Winton",

note = "Funding Information: Earlier versions of this paper were circulated under the title, “Competition and Corporate Fraud Waves.” We are grateful for comments from Andrew Call, Douglas Cumming, Nishant Dass, Raquel Gaspar, Eitan Goldman, Gerard Hoberg, and Jonathan Karpoff, and especially to our discussant, Mads Borelli-Kjaer, an anonymous referee, and the editor. We also thank seminar and conference participants at the University of Minnesota, the Shanghai Advanced Institute for Finance, the Stockholm School of Economics, the European School of Management and Technology, University of Nottingham, Texas A&M University, Southern Methodist University, Georgia State University, Boston College, IDC Herzliya, Tel Aviv University, Universitat Pompeu Fabra, 2011 Financial Intermediation Research Society Conference, 2011 European Finance Association Annual Meeting, the CFA-FAJ-Schulich Conference on Fraud, Ethics and Regulation, 2012 Conference on Empirical Legal Studies, 2012 Conference on Financial Economics and Accounting, 2013 American Economics Association Annual Meeting, 2013 European Winter Finance Summit, and 2020 FAU/Journal of Corporate Finance Conference Conference on “Corporate Failure: Decline, Collapse and Scandal”. Publisher Copyright: {\textcopyright} 2021 Elsevier B.V.",

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AU - Winton, Andrew

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N2 - We examine three information channels through which product market interactions in an industry can affect firms' incentives to misreport financial information to investors. We find that lower product market sensitivity to individual firms' information and greater use of relative performance evaluation encourage the commission of financial fraud. Industry structures that give rise to less collection of information about individual firms decrease the probability of fraud detection and increase the probability of fraud commission. We also examine dynamic effects of fraud. Our results suggest that, in fragmented industries, fraud can amplify cyclical fluctuations in the real economy.

AB - We examine three information channels through which product market interactions in an industry can affect firms' incentives to misreport financial information to investors. We find that lower product market sensitivity to individual firms' information and greater use of relative performance evaluation encourage the commission of financial fraud. Industry structures that give rise to less collection of information about individual firms decrease the probability of fraud detection and increase the probability of fraud commission. We also examine dynamic effects of fraud. Our results suggest that, in fragmented industries, fraud can amplify cyclical fluctuations in the real economy.

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KW - Bust

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KW - Misreporting

KW - Product market interaction

KW - Relative performance evaluation

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Industry informational interactions and corporate fraud

Abstract

Bibliographical note

Keywords

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