Product Similarity, Benchmarking, and Corporate Fraud

Abstract

We document that firms with greater product similarity to their peers exhibit a lower rate of financial fraud. Our evidence suggests that peer similarity enhances the information environment, which improves benchmarking and increases the likelihood of detection. Consequently, ex-ante managers are less likely to commit fraud. The relation between product similarity and fraud remains after controlling for alternative mechanisms including incentive compensation structures, competition, and internal and external governance characteristics. Overall, our findings indicate that peer similarity increases the marginal costs of fraud and shifts managers’ trade-offs in their decision to commit fraud.

Keywords: Corporate Fraud, Product Market Similarity, Product Similarity, Benchmarking, Corporate Governance

JEL Classification: G30, M41, G34