Proxies and Databases in Financial Misconduct Research

67 Pages Posted: 16 Feb 2017

See all articles by Jonathan M. Karpoff

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business

Allison Koester

Georgetown University

D. Scott Lee

University of Nevada, Las Vegas - Lee Business School

Gerald S. Martin

American University - Kogod School of Business

Date Written: February 8, 2017

Abstract

An extensive literature examines the causes and effects of financial misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Accounting and Auditing Enforcement Releases (AAERs). We show that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which regulators brought enforcement actions for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four features of each database that affect inferences from empirical tests. First, each database contains information on only its proxy event (e.g., restatements) that many researchers use to identify misconduct and do not cover other relevant announcements that can affect a researcher’s interpretation and use of the events. Second, the initial public revelation of financial misconduct occurs, on average, months before the initial coverage in these databases, leading to discrepancies in event study measures and pre/post comparison tests. Third, most of the events captured by these databases are unrelated to financial fraud, and efforts to cull non-fraud events yield heterogeneous results. Fourth, three of the four databases omit large numbers of events they are designed to capture. We show the extent to which each database is subject to these concerns and offer suggestions for researchers using these databases.

Keywords: financial misconduct, restatements, securities class action lawsuits, AAERs

JEL Classification: G38, K22, K42, M41

Suggested Citation

Karpoff, Jonathan M. and Koester, Allison and Lee, D. Scott and Martin, Gerald S., Proxies and Databases in Financial Misconduct Research (February 8, 2017). Accounting Review, Forthcoming; Georgetown McDonough School of Business Research Paper No. 2811778. Available at SSRN: https://ssrn.com/abstract=2917524

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3200
United States
206-685-4954 (Phone)
206-221-6856 (Fax)

Allison Koester (Contact Author)

Georgetown University ( email )

McDonough School of Business
Washington, DC 20057
United States
202.687.6461 (Phone)

HOME PAGE: http://explore.georgetown.edu/people/apk29/

D. Scott Lee

University of Nevada, Las Vegas - Lee Business School ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States
702-895-2526 (Phone)
702-895-4630 (Fax)

HOME PAGE: http://faculty.unlv.edu/slee

Gerald S. Martin

American University - Kogod School of Business ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-3914 (Phone)

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