Database Challenges in Financial Misconduct Research
Jonathan M. Karpoff
University of Washington - Michael G. Foster School of Business
D. Scott Lee
University of Nevada, Las Vegas - Lee Business School
Gerald S. Martin
American University - Kogod School of Business
May 30, 2014
Georgetown McDonough School of Business Research Paper No. 2012-15
More than 150 research papers that examine the causes and effects of financial misconduct compile samples use one of four popular databases. We use a hand-collected sample of 1,099 cases identified by the SEC for financial misrepresentation to document, calibrate, and measure the importance of four features in each of these four databases that pose challenges for researchers. First, the initial public revelations of financial misconduct occur months before the initial coverage in these databases. Second, these databases collect just one type of event, so they omit other relevant announcements that affect a researcher’s use of the events. Third, most of the events captured by these databases are unrelated to financial fraud. Fourth, the databases miss large numbers of events they were designed to capture. Event study tests and comparisons of firm characteristics show that these four database features can lead to economically meaningful biases in many applications. We show which database is most susceptible to each potential challenge, and propose remedies for researchers seeking to use these four databases.
Number of Pages in PDF File: 65
Keywords: Financial misconduct, restatement, class action lawsuit, Securities and Exchange Commission
JEL Classification: G38; K22; K42; M41
Date posted: July 19, 2012 ; Last revised: June 12, 2014
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