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Do Fraudulent Firms Produce Abnormal Disclosure?

52 Pages Posted: 26 Jul 2013 Last revised: 23 Apr 2015

Gerard Hoberg

University of Southern California - Marshall School of Business

Craig M. Lewis

Vanderbilt University - Finance

Date Written: April 20, 2015


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.

Keywords: Fraud, Disclosure, Herding, Litigation, Text Analytics, Enforcement

JEL Classification: G34, G38, G39, M41

Suggested Citation

Hoberg, Gerard and Lewis, Craig M., Do Fraudulent Firms Produce Abnormal Disclosure? (April 20, 2015). Vanderbilt Owen Graduate School of Management Research Paper No. 2298302; Robert H. Smith School Research Paper. Available at SSRN: or

Gerard Hoberg (Contact Author)

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States


Craig Lewis

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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