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Corporate Fraud and Business Conditions: Evidence from IPOsTracy Yue WangUniversity of Minnesota - Twin Cities - Carlson School of Management Xiaoyun YuIndiana University Bloomington - Department of Finance; China Academy of Financial Research (CAFR) Andrew WintonUniversity of Minnesota - Twin Cities - Carlson School of Management December 23, 2009 Journal of Finance, Forthcoming Abstract: We examine how a firm’s incentive to commit fraud when going public varies with investor beliefs about industry business conditions. Fraud propensity increases with the level of investor beliefs about industry prospects but decreases in the presence of extremely high beliefs. Evidence suggests that two mechanisms are at work: monitoring by investors, and short-term executive compensation, both of which vary with investor beliefs about industry prospects. We also find evidence that monitoring incentives of investors and underwriters differ. Our results are consistent with the predictions of recent models of investor beliefs and corporate fraud, and suggest that regulators and auditors should be especially vigilant for fraud during booms.
Number of Pages in PDF File: 72 Keywords: initial public offerings, investor sentiment, corporate fraud, financial intermediations JEL Classification: E3, G24, G3 Accepted Paper SeriesDate posted: March 22, 2008 ; Last revised: February 22, 2010Suggested CitationContact Information
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