Do Fraudulent Firms Produce Abnormal Disclosure?
University of Southern California - Marshall School of Business
Craig M. Lewis
Vanderbilt University - Finance
October 21, 2014
Vanderbilt Owen Graduate School of Management Research Paper No. 2298302
Robert H. Smith School Research Paper
We present two new hypotheses regarding the textual disclosures of fraudulent firms. First, these firms discuss performance in a manner that is similar to their industry peers. Second, their qualitative disclosures are distinct from their industry peers but instead are similar to other fraudulent firms. 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 evidence that fraudulent firms do not make qualitative disclosures that resemble their industry peers but instead cluster with other fraudulent peer firms. Content analysis reveals that fraudulent firms under-disclose details relating to governance, financial liquidity and explaining revenues.
Number of Pages in PDF File: 51
Keywords: Fraud, Disclosure, Herding, Litigation, Text Analytics, Enforcement
JEL Classification: G34, G38, G39, M41working papers series
Date posted: July 26, 2013 ; Last revised: November 25, 2014
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