52 Pages Posted: 26 Jul 2013 Last revised: 23 Apr 2015
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: 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: https://ssrn.com/abstract=2298302 or http://dx.doi.org/10.2139/ssrn.2298302