Do Fraudulent Firms Strategically Manage Disclosure?
University of Southern California - FBE Dept; University of Maryland - Department of Finance
Craig M. Lewis
Vanderbilt University - Finance
August 17, 2014
Vanderbilt Owen Graduate School of Management Research Paper No. 2298302
Robert H. Smith School Research Paper
We present two new hypotheses regarding the strategic textual disclosures of fraudulent firms. First, these firms manage disclosure to escape detection. Second, they manage disclosure to achieve fraud-driven benefits, such as an inappropriately low cost of financing. We use text-based analysis of 10-K MD&A disclosures to compare disclosures of firms involved in SEC enforcement actions to various counterfactuals including each firm's own disclosure both before and after the alleged violations. We find support for both hypotheses. Content analysis reveals that fraudulent firms under-disclose details relating to governance, financial constraints and explaining revenues. The results suggest that fraudulent firms deflect attention away from the underlying problems that precipitated fraudulent behavior.
Number of Pages in PDF File: 56
Keywords: Fraud, Disclosure, Herding, Litigation, Text Analytics, Enforcement
JEL Classification: G34, G38, G39, M41working papers series
Date posted: July 26, 2013 ; Last revised: August 27, 2014
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