Corporate Financial Fraud: An Application of Detection Controlled Estimation

54 Pages Posted: 27 Oct 2010 Last revised: 2 Jul 2013

Si Li

Wilfrid Laurier University - School of Business & Economics

Date Written: July 1, 2013

Abstract

The paper studies corporate fraud and detection, using an empirical framework that models the strategic interdependence between fraud and detection and accounts for the possibility that some fraud is undetected (incomplete detection). The framework first models fraud as a discrete choice and then models the magnitude of fraud. The results find that failure to account for incomplete detection could lead to downward biases in estimating the effects of various factors on the likelihood of fraud. Furthermore, the empirical model in the paper has a number of potential applications.

Keywords: Fraud, detection, corporate misreporting, monitoring, detection controlled estimation, incomplete detection, partial observability, probit models, Tobit models, simultaneous equation models

JEL Classification: G30, C34, C35, K22, K42

Suggested Citation

Li, Si, Corporate Financial Fraud: An Application of Detection Controlled Estimation (July 1, 2013). Available at SSRN: https://ssrn.com/abstract=1698038 or http://dx.doi.org/10.2139/ssrn.1698038

Si Li (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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