Corporate Fraud and Business Conditions: Evidence from IPOs

72 Pages Posted: 22 Mar 2008 Last revised: 14 May 2014

See all articles by Tracy Yue Wang

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management

Xiaoyun Yu

Indiana University Kelley School of Business; European Corporate Governance Institute (ECGI); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR)

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: December 23, 2009

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.

Keywords: initial public offerings, investor sentiment, corporate fraud, financial intermediations

JEL Classification: E3, G24, G3

Suggested Citation

Wang, Tracy Yue and Yu, Xiaoyun and Winton, Andrew, Corporate Fraud and Business Conditions: Evidence from IPOs (December 23, 2009). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1024229

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Xiaoyun Yu (Contact Author)

Indiana University Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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