Abstract

http://ssrn.com/abstract=2222608
 
 

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How Pervasive is Corporate Fraud?


I. J. Alexander Dyck


University of Toronto - Rotman School of Management

Adair Morse


University of California, Berkeley - Haas School of Business

Luigi Zingales


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of Chicago - Polsky Center for Entrepreneurship; European Corporate Governance Institute (ECGI)

February 22, 2013

Rotman School of Management Working Paper No. 2222608

Abstract:     
We estimate what percentage of firms engage in fraud and the economic cost of fraud. Our estimates are based on detected frauds, and frauds that we infer are started but are not caught. To identify the ‘iceberg’ of undetected fraud we take advantage of an exogenous shock to the incentives for fraud detection: Arthur Andersen’s demise, which forces companies to change auditors. By assuming that the new auditor will clean house, and examining the change in fraud detection by new auditors, we infer that the probability of a company engaging in a fraud in any given year is 14.5%. We validate the magnitude of this estimate using alternative methods. We estimate that on average corporate fraud costs investors 22 percent of enterprise value in fraud-committing firms and 3 percent of enterprise value across all firms.

Number of Pages in PDF File: 56

Keywords: corporate fraud, governance, detection

JEL Classification: G34, K22, G38

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Date posted: February 24, 2013  

Suggested Citation

Dyck, I. J. Alexander and Morse, Adair and Zingales, Luigi, How Pervasive is Corporate Fraud? (February 22, 2013). Rotman School of Management Working Paper No. 2222608. Available at SSRN: http://ssrn.com/abstract=2222608 or http://dx.doi.org/10.2139/ssrn.2222608

Contact Information

I.J. Alexander Dyck
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-0819 (Phone)
Adair Morse (Contact Author)
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
Luigi Zingales
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-3196 (Phone)
773-834-2081 (Fax)

Chicago Booth School of Business Logo

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
University of Chicago - Polsky Center for Entrepreneurship
Chicago, IL 60637
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
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