Product Market Interactions and Corporate Fraud

48 Pages Posted: 19 Feb 2014

See all articles by Tracy Yue Wang

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: February 13, 2014

Abstract

We examine three information channels through which product market interactions in an industry can affect firms’ incentives to misreport financial information to investors. We find that lower product market sensitivity to individual firm’ information and greater use of relative performance evaluation encourage the commission of financial fraud. Less collection of information about individual firms decreases the probability of fraud detection and increases the probability of fraud commission. We also examine dynamic effects of fraud. Our results suggest that, in fragmented industries, fraud can amplify cyclical fluctuations in the real economy.

Keywords: corporate securities fraud, misreporting, product market interaction, boom, bust, relative performance evaluation

JEL Classification: G30, G31, G32, G34

Suggested Citation

Wang, Tracy Yue and Winton, Andrew, Product Market Interactions and Corporate Fraud (February 13, 2014). Available at SSRN: https://ssrn.com/abstract=2398035 or http://dx.doi.org/10.2139/ssrn.2398035

Tracy Yue Wang (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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