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.
Bibliographical noteFunding 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”.
© 2021 Elsevier B.V.
- Corporate securities fraud
- Product market interaction
- Relative performance evaluation