Corporate Fraud and Business Conditions: Evidence from IPOs
72 Pages Posted: 22 Mar 2008 Last revised: 14 May 2014
Date Written: December 23, 2009
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: Suggested Citation