Corporate Securities Fraud: Insights from a New Empirical Framework

Abstract

Empirical analysis of corporate fraud faces a challenge because the commission of fraud is not directly observable. We observe only detected frauds. In this paper I introduce a new empirical model to address this partial observability of fraud. The new model generates new insights about not only the determinants of fraud commission and fraud detection, but also the interaction between the two latent processes. I also show that the empirical models used in the existing literature can lead to incorrect assessment of corporate or public policies designed to combat fraud.

Keywords: securities fraud, fraud detection

JEL Classification: G30