Do Fraudulent Firms Produce Abnormal Disclosure?
University of Southern California - Marshall School of Business
Craig M. Lewis
Vanderbilt University - Finance
April 20, 2015
Vanderbilt Owen Graduate School of Management Research Paper No. 2298302
Robert H. Smith School Research Paper
Using text-based analysis of 10-K MD&A disclosures, we find that fraudulent firms produce verbal disclosure that is abnormal relative to strong counterfactuals. This abnormal text predicts fraud out of sample, has a verbal factor structure, and can be interpreted to reveal likely mechanisms that surround fraudulent behavior. Using a conservative difference-based approach, we find evidence that fraudulent managers grandstand good performance and disclose fewer details explaining the sources of the firm's performance. We also find new interpretable verbal support for existing hypotheses suggested in the literature, for example, that some managers commit fraud in order to improve their odds of raising capital at low cost.
Number of Pages in PDF File: 52
Keywords: Fraud, Disclosure, Herding, Litigation, Text Analytics, Enforcement
JEL Classification: G34, G38, G39, M41
Date posted: July 26, 2013 ; Last revised: April 23, 2015