Product Market Interactions and Corporate Fraud
48 Pages Posted: 19 Feb 2014
Date Written: February 13, 2014
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: Suggested Citation